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63d Congress, ) HOUSE OF REPRESENTATIVES, j Report 
1st Session. J | No. 69. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM OF 
THE UNITED STATES. 


September 9, 1913.—Committed to the Committee of the Whole House on the state_ 

of the Union and ordered to be printed. £ $ 


U (2*~y , 

Mr. Glass, from the Committee on Banking and Currency, submitted 

the following 

REPORT. 

TOGETHER WITH VIEWS OF THE MINORITY AND MINORITY VIEWS. 

[To accompany H. R. 7837.] 

The Committee on Banking and Currency, to which was referred 
the bill (H. II. 7837) to provide for the establishment of Federal re¬ 
serve banks, to furnish an elastic currency, to afford means of redis¬ 
counting commercial paper, to establish a more effective supervi¬ 
sion of banking in the United States, and for other purposes, having 
had the same under consideration, report it back to the House 
with certain amendments and recommend that the bffl as amended 
do pass. 

AMENDMENTS. 

The amendments to the bill are almost without exception mere 
alterations of phraseology, made for the purpose of consistency or 
with a view to clarifying the meaning of certain provisions. Thus, 
in section 2, page 3, line 19, the word “subscriber” is stricken out 
and the words “member bank” substituted in order to conform the 
language to other provisions of the bill; and so in section 3, page 4, 
lines 14, 16, and 17, and in section 5, page 11, lines 15 and 21, and on 
page 12, lines 6, 7, 10, 13, and 16, and in section 6, page 12, lines 20 
and 21, and on page 13, lines 2 and 3; in section 7, page 13, lines 9, 
10, and 22; in section 14, page 24, line 19. 

Section 2, page 3, lines 24 and 25, is so amended by the committee 
as to require that no Federal reserve bank shall “commence business” 
with a.paid-up and unimpaired capital less in amount than $5,000,000, 
the original provision being that no Federal reserve bank should 
“be organized” with a paid-up and unimpaired capital less than 
$5,000,000. This alteration is considered desirable by reason of the 
fact that member banks are permitted to pay their stock subscrip- 






2 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


tions in two installments, covering a period of 60 days, and it is not 
deemed advisable to permit the Federal reserve banks to begin busi¬ 
ness until the total required subscriptions are paid, albeit they should 
be permitted to organize. 

In section 3, page 4, line 12, the word “each” is inserted after 
“$100,” and in lines 14 and 16 the word “stock” is inserted, to make 
it clear that the surplus of a bank is not comprehended in the use of 
the term “capital.” 

Section 4, page 4, beginning with line 24 and continuing to the 
word “Act,” in Tine 9, page 5, is stricken out and the words in italics 
substituted in order to make plainer the method of organization pre¬ 
scribed for Federal reserve banks. The change in phraseology simply 
embodies the language of the statute relating to the organization of 
national banks and applies it to the organization of Federal reserve 
banks, whereas the provision originally simply made reference to the 
statute. In the same section, page 8, line 14, an amendment is 
inserted making provision for the contingency of a tie vote in ballot¬ 
ing for Federal reserve bank directors of class A. 

In section 5, page 12, line 17, an amendment is inserted requiring 
the Federal reserve board to prescribe regulations under which Federal 
reserve banks shall be required to make payment for surrendered 
shares of member banks which either reduce their capital stock or go 
into voluntary liquidation. 

In section 10, page 17, line 22, and on page 18, line 1, and also in 
section 11, page 19, lines 15 and 16, and likewise in section 12, page 
21, line 19, and on page 22, line 2, where the word “board” occurs 
the committee has altered the expression to “Federal reserve board” 
to make it more explicit. 

In section 14, page 25, line 7, the semicolon after the word “Act” 
is stricken out and a comma substituted, and in line 9, after the word 
“securities,” the comma is stricken out and a semicolon substituted, 
in order to make clearer the meaning of the provision. 

In section 17, page 30, lines 9 and 10, an erroneous reference is 
corrected by striking out the words “and 15.” 

In section 20, page 37, line 16, and in the same section, page 38, 
line 16, the reserve requirement of 25 per cent within the 60-day 
period is dropped to 20 per cent in order to enable the reserve city 
and central reserve city banks the better to respond to the immediate 
demand upon them from the country banks in the first stage of shift¬ 
ing reserves. In short, instead of reducing the reserve requirement 
of the reserve city and central reserve city banks at the end of 60 
days from the establishment of the Federal reserve bank, the reduc¬ 
tion is made immediately after the Secretary of the Treasury shall 
have officially announced the organization of such bank. In the 
same section, page 38, lines 24 and 25, and on page 39, lines 1,2, and 
3, an alteration in phraseology is made so as to make the reserve 
requirement of central reserve city banks correspond exactly with the 
requirement of reserve city banks. 

In section 26, page 44, lines 14 and 15, having reference to loans 
by national banks on farm lands, the words “or fifty per centum of 
its time deposits ” are stricken out, for the reason that the committee 
thinks that the aggregate of such loans should be based on a bank’s 
capital and surplus rather than on the constantly fluctuating per 
cent of time deposits. 


D, OF B, 





CHANGES IN THE BANKING AND CURRENCY SYSTEM. 




V , 


NATURE AND PURPOSE OF H. R. 7837. 

H. R. 7837 is mllended to bring about necessary changes in the 
present banking and currency system of the United States and to 
correct long-standing evils that have had a slow and deep-rooting 
growth. It aims at the rectification of the essential defects of the 
present system, although it does not seek to make all the innovations 
that might, from an ideal standpoint, be deemed desirable. 


DEMAND FOR ACTION. 


There has for a great while been strong public demand for remedial 
legislation on banking and currency. This demand was partly ob¬ 
scured during the controversy regarding the adoption of a monetary 
standard. Yet even before the adoption of the act of March 14, 1900, 
there had been a vigorous popular movement directed to the amend¬ 
ment of the national banking act. This took form in various volun¬ 
tary organizations and in actions by bankers’ associations as well as 
by organizations of business and commercial interests. It was 
practically universally admitted from 1898 onward that one of the 
basic commercial evils of the day was the lack of a suitable banking 
system. 

This view has been frequently reiterated and restated ever since 
the earlier days of the banking discussion to which reference has 
been made. Of late it has taken form in renewed agitation following 
the panic of 1907 and promises of action have been made in nearly 
every political platform, by whatever party adopted, within recent 
years. The call is loud and comes from many sources of widely 
divergent character. 

It is probable that not a single scientific student of currency and 
banking could be found who would approve the conditions which 
now exist in the United States or the banking system under which they 
have sprung up. Nowhere in the world to-day can there be found 
a banking system similar or analogous to that of the United States, 
or a situation as to credit which could be compared to that pre¬ 
vailing in this country at the present moment. 


REASONS FOR ACTION. 

The considerations which thus dictate action upon the banking 
and currency question at the present time have often been stated 
and from many different points of view. In the opinion of the com¬ 
mittee there can be no doubt whatever with regard to the essential 
elements of the case. The general background of the situation 
which calls for banking reform is this: Half a century ago Congress, 
in the midst of a civil war, established a new system subsequently 
developed into the national banking system. The essential elements 
in this system were three in number: (1) The maintenance of the 
principle of free banking through the unrestricted organizati n of 
banking institutions; (2) the refusal to allow the extension of sys¬ 
tems of banking throughout the country by the organization of 
branch banks; and (3) the adoption of a peculiar system of note issue 


4 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


whereby the banks were required to buy a minimum of national 
bonds when chartered and subsequently to deposit with the Treas¬ 
ury bonds to protect all currency received by them for circulation. 
The different elements in this system will be fully considered at other 
points in the present report. It is enough now to suggest the gen¬ 
eral bearings of the case. This system has continued substantially 
unamended to the present time, and to-day includes some 7,473 
banking institutions within its range. These banking institutions 
vary in size from $25,000 capital to $25,000,000. They are entirely 
local. The only bond between them is found either in mutual stock 
ownership or in the redepositing of reserves as they are permitted 
to do under the national-bank act. In view of the lack of any 
factor of unity the national banks have failed to furnish to the Nation 
as a whole a single and powerful system of credit. The strength of 
the credit situation in each community has depended upon the 
strength of the banks there situated, and, except in times of stress, 
has even in these communities been measured by the strength not of 
the strongest, but of the weakest institution there located. In times 
of stress the banks of such independent communities have at times 
in self-defense united to place their combined resources temporarily 
at the service of the public and of one another, but they have taken 
such action only under stern pressure. As a rule, they have been 
individualistic in the highest degree, and the country has lacked the 
capacity either to prevent credit disorders from breaking out locally 
and spreading to the centers, or to defend its own resources against 
the monetary demands of foreign nations or against the infection 
due to bad financial conditions in countries with which we stood in 
close relations. 

The evidence that this system has not done its duty is not found 
in dishonesty or failure. While at times failures have been numer¬ 
ous among the national banks, as must necessarily be the case in 
any system of numerous and highly individualized banks, the average 
record of failure or irregularity has been small. No noteholder has 
ever lost a dollar, and the losses of depositors constitute in the aggre¬ 
gate a very small percentage of the total deposits held by the banks. 
4 he country has been enabled to do an expanding business, to its 
own great profit. But the evil of the situation has been perceived 
upon all those occasions when unusual pressure was brought to bear 
upon the banks of the’ country. In 1873, 1884, 1890, 1893, 1896, 
and 1907, to mention the most familiar occasions, it has been neces¬ 
sary for large groups of banks practically to suspend specie payments. 
They have done so as the result of concerted action, and one feature 
of the situation upon each of these occasions has been a genuine 
effort to relieve conditions by resorting to an issue of obligations for 
which the banks became jointly liable, and which in some measure 
helped to overcome shortage of currency and the stringency that 
was associated with it. In spite of all that could be done, however, 
the public has been put to great inconvenience and loss upon such 
occasions, the relations of the United States with foreign countries 
have been embarrassed, if not brought into jeopardy, the failure of 
firms, corporations, and individuals has been necessitated, and the 
loss of wealth has been tremendous. We think it is axiomatic that 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 5 

these conditions should not be allowed to repeat themselves, but that 
they should in some manner be relieved or prevented, if possible. 

On the other hand, the national banking system, with its many 
merits, has not proved responsive to the seasonal needs of the com¬ 
munity. At periods of exceptional demand for credit the movement 
of currency between various points, with attendant expense and 
delay, has been enormous, while the expansion of this currency has 
been slow and halting, local necessities being met by withdrawing 
circulating media from other regions. In consequence, the market¬ 
ing of the country’s annual crops has been slow, difficult, and expen¬ 
sive, and it has frequently happened that various sections of the Nation 
have been obliged to depend too largely upon the limited exten¬ 
sion of credit to them by banks located elsewhere. 

Conversely, it has been found that whenever the seasonal needs of 
credit in agricultural regions throughout the United States had been 
met and when the crops there produced had been fully disposed of 
there was an accumulation of currency, partly borrowed from other 
portions of the country, partly of local origin, which could not be 
used to advantage upon safe or sound security throughout the less 
active portions of the business year, and which was therefore shipped 
to banks in distant cities, that it might be there put to some em¬ 
ployment that would yield its owners an income. It has not always 
turned out that the employment thus found for it was desirable or, 
on the whole, conducive to the good of the country. 

NATURE OF EXISTING CONDITIONS. 

Turning from the general considerations which tend to prevent the 
acceptance of existing banking conditions as satisfactory, there is 
need of a recognition of the immediate status of the financial and 
business world at the present day. There can be no doubt that for 
some time past the national banks of the United States have been in 
a difficult situation. The committee has been amply warned and 
advised of this state of things, and a general knowledge of it is com¬ 
mon to the country at large, certainly to all close or careful observers 
of existing conditions. In the reserve centers to-day banks are unable 
to extend the credit that they would under normal circumstances be 
disposed to grant, while merchants are frequently unable to get the 
accommodation to which they are entitled. A general tendency 
toward stringency evidently exists, and while this is not peculiar 
to-day to the United States it should not be felt here in anything 
like its present severity, inasmuch as this country has not had to bear 
the burden of warfare and destruction of capital that has been thrown 
upon the European countries. All over the western world there is 
now a distinct shortage of capital, both fixed and floating, while our 
banking and reserve situation is anything but reassuring. Under 
such circumstances it is highly desirable that the utmost efficiency 
should be given to the reserve resources in the hands of the banks 
and that they should be enabled to do all that circumstances will 
permit in extending to the business world the volume of loans that it 
needs, so long as they maintain themselves in position to protect the 
accommodation thus granted. Legislation which, will relieve this 
pending condition of pressure and possible panic, which will place 


6 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


the banks in position to employ their resources to the best advantage, 
which will obviate the necessity of expensive transfers of funds be¬ 
tween different parts of the country, and which whl furnish loans 
upon an inexpensive but absolutely safe basis was never more ur¬ 
gently demanded than it is to-day. It is this condition of affairs 
that has most strongly moved tk/ Committee on Banking and Cur¬ 
rency in its effort to press a measure of relief upon the attention of 
the House. 


LACK OF PROTECTION AGAINST PANICS. 

Reference has just been made to the fact that the national banking 
system, among other defects, fails to afford any safeguard against 
panics and commercial stringencies or any means of alleviating them. 
This fact has received more attention than has thus far been given 
to any other in the whole range of the banking and currency dis¬ 
cussion, and there has been more effort to apply some legislative 
remedy to this than to any other condition. 

In practice, when commercial credit had hopelessly broken down 
and the banks of the country found themselves seriously threatened 
by danger of failure, they have united for mutual protection, and 
clearing-house associations in the chief cities of the country have 
joined in the issue of certificates good in liquidating obligations 
between banks. Sporadic and temporary as this remedy has been, 
it nevertheless has proven effective while in use, and after the panic 
of 1907 an attempt was made to provide for a permanent resort to 
this so-called clearing-house currency by passing the act of May 30, 
1908, ordinarily known as the Aldrich-Vreeland law. This law will 
expire automatically on June 30, 1914, inasmuch as the act itself 
carries a provision limiting its own life to six years. The fact that 
this legislation will thus expire is regarded by many persons as an 
additional argument for action at the present time, inasmuch as the 
measure in question constitutes the only emergency protection against 
conditions of sudden difficulty in the money market that the country 
now has. The Aldrich-Vreeland law provides for the establishment 
of organizations of banks, to be known as National Currency Asso¬ 
ciations, which are to be allowed to take out notes under certain 
conditions. 

It is worth observing that up to date the Aldrich-Vreeland associa¬ 
tions have been an entire dead letter. The situation regarding them 
was clearly sketched by the Comptroller of the Currency in liis last 
annual report, in which he said: 

Under authority of the act of May 30, 1908, providing for the issue of “additional 
currency” secured otherwise than by United States bonds, 18 national currency 
associations have been formed, all of which, with the exception of the Los Angeles 
association, were formed prior to the current year. Each association has an aggre¬ 
gate capital and surplus of at least $5,000,000, and is composed of at least 10 national 
banks having an unimpaired capital and an unimpaired surplus of not less than 20 
per cent of the capital, and having United States bonds on deposit to secure circula¬ 
tion to the extent of at least 40 per cent of its capital. There are 286 national banks 
forming these 18 national currency associations, their capital aggregating $321,105,710 
and surplus $281,544,722. The capital represented is slightly in excess of 30 per 
cent of the paid-in capital stock of all national banks, as shown by the reports for 
September 4 last. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 7 


The title, membership, capital, and surplus of each of the associations are shown in 
the following table: 


National currency associations. 


Associations. 


National Currency Association of Washington, D. C. 

National Currency Association of the city of New York, N. Y. 

National Currency Association of Philadelphia, Pa. 

National Currency Association of the State of Louisiana. 

National Currency Association of Boston, Mass. 

National Currency Association of Georgia. 

National Currency Association of Chicago. 

National Currency Association of St. Louis, Mo. 

National Currency Association of St. Paul and Minneapolis... 

National Currency Association of Detroit. 

National Currency Association of Albany, etc... 

National Currency Association of Kansas City, etc. 

National Currency Association of Baltimore. 

National Currency Association of Cincinnati. 

National Currency Association of Dallas. 

National Currency Association of Alabama. 

National Currency Association of Denver, etc. 

National Currency Association of Los Angeles. 

Total.. 


Number 
of banks. 

Capital. 

Surplus. 

10 

$5,702,000 

$4,792,512 

33 

117,052,000 

127,175,000 

27 

20,975,000 

36,665,000 

10 

6,100,000 

4,030,000 

14 

26,700,000 

18,950,000 

28 

8,206,000 

6,434,000 

10 

42,750,000 

25,950,000 

10 

19,510,000 

9,095,000 

14 

10,750,000 

9,545,000 

15 

6,325,000 

3,101,200 

11 

3,560,000 

3,385,000 

10 

6,659,000 

3,800,000 

18 

12,340,710 

7,752,010 

10 

14,300,000 

6,450,000 

14 

3,760,000 

3,100,000 

25 

5,700,000 

3,497,500 

15 

4,700,000 

4,991,500 

12 

6,025,000 

2,831,000 

286 

321,105,710 

281,544,722 


In accordance with the terms of the Aldrich-Vreeland Act, $500,000,000 in currency 
has been printed and is now ready, in blank, for issue in case of a call from any of the 
banks or currency associations authorized to issue notes by the terms of the law. 
Individual banks may issue such notes by depositing at the Treasury State or muni¬ 
cipal bonds of approved kinds, receiving in exchange 90 per cent of the par value of 
such bonds, provided they are worth at least par. The currency associations may ob¬ 
tain notes equal to 75 per cent of the face value of commercial paper left with them by 
the constituent banks of the association. 

One reason why the Aldrich-Vreeland law has never been availed of is that the issue 
of the currency was made very expensive, owing to the imposition of a heavy tax on 
such notes as might be taken out, while the banks were for a long time reluctant to go 
into the currency associations because of the onerous conditions under which they 
were at first required to be authorized by the terms of the regulations laid down by the 
Secretary of the Treasury. The law is thus not likely to be resorted to except in cases 
of very severe necessity for notes; but, even if such were not the case, it would remain 
a temporary expedient and a mere extension of its life would be only the renewal of 
such an expedient. 

No statement could make clearer the inadequate character of the 
Aldrich-Vreeland Act or its purely temporary character. It is a weak 
makeshift, soon to expire. 


RECOGNITION OF SITUATION. 


That under the conditions just sketched there is a responsibility 
resting upon those in charge of the Government of the United States 
no one can deny. No more serious obligation to-day exists in the 
whole range of national problems. This duty has been amply recog¬ 
nized by the Democratic Party. In platform after platform it has 
stood firmly for the adoption of sound and courageous legislation, 
and at Baltimore in 1912 it adopted without dissent the following 
plank: 

We oppose the so-called Aldrich bill for the establishment of a central bank; and 
we believe our country will be largely freed from panics, and consequent unemploy¬ 
ment and business depression, by such a systematic revision of our banking laws as will 
render temporary relief in localities where such relief is needed, with protection from 
control or domination by what is known as the Money Trust. 





























s 


CHANGES IN THE BANKING AND CUBRENCY SYSTEM. 


Banks exist for the accommodation of the public and not for the control of business. 
All legislation on the subject of banking and currency should have for its purpose the 
securing of these accommodations on terms of absolute security to the public and of 
complete protection from the misuse of the power that wealth gives to those who 
possess it. 

That this plank constitutes a direct claim upon the party, challeng¬ 
ing its immediate attention, is the opinion of the Banking and Cur¬ 
rency Committee. The claim is the more urgent because there has 
been a most lamentable failure to face the banking situation fairly 
in past legislation. 

PREPARATIONS FOR WORK. 

Believing that there would be a Democratic victory at the polls 
and fully appreciating the obligations to follow therefrom, the 
Banking and Currency Committee of the Sixty-second Congress had 
already begun preparations looking to the redemption of party 
past and present. In that Congress a subcommittee of the 
g and Currency Committee was directed to begin a study of 
the question of reform legislation. This subcommittee conducted 
preliminary inquiries during the summer and autumn of 1912, and 
having thus marked out the lines of necessary work undertook 
hearings during January and February, 1913, for the purpose of 
obtaining the views of qualified members of the community with 
regard to what ought to be done. The subcommittee extended 
invitations at that time to representatives of labor organizations, to 
agricultural associations, to the bankers of the country, to voluntary 
associations of citizens interested in questions of banking, money, 
and credit, and to individuals recognized as being expert students of 
monetary and credit conditions. While some of those who received 
invitations to appear before the subcommittee failed to accept, the 
majority did so, and practically all the essential phases of the situation 
were thoroughly canvassed. Besides holding these hearings, the com¬ 
mittee sent to many economists, bankers, and expert persons ques¬ 
tions bearing upon the currency and banking problem and received 
responses giving the views of those who were thus appealed to. 
H. R. 7837 was drafted as the result of these investigations and thus 
represents, all told, the results of approximately 16 months’ work. 

The Banking and Currency Committee as at present organized held 
its first meeting on June 6,1913, and since that date the committee has 
devoted almost continuous work to the discussion of the bill. The 
outcome of its deliberations has been to approve the essential features 
of the bill H. R. 7837, with some modifications which are embodied 
in the measure as now reported. 

WORK OF MONETARY COMMISSION. 

The committee, in undertaking to prepare for banking and currency 
legislation, has first of all endeavored to take into account all existing 
data and to examine such preliminary work as had neen made avail¬ 
able. The most recent collection of such material available is that 
prepared under the auspices of the National Monetary Commission. 
While the Republican Party refused to take any affirmative action, 
except the act or May 30, 1908, it did undertake what was called an 
investigation of monetary and banking conditions. The act of 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


9 


May 30, 1908, known as the Aldrich-Vreeland Act, already referred to, 
provided for the appointment of a body known as the National 
Monetary Commission, in the following language: 

APPOINTMENT OF MONETARY COMMISSION. 

Sec. 17. That a commission is hereby created, to be called the “National Mone¬ 
tary Commission,” to be composed of nine members of the Senate, to be appointed by 
the Presiding Officer thereof, and nine Members of the House of Representatives, to be 
appointed by the Speaker thereof; and any vacancy on the commission shall be filled 
in the same manner as the original appointment. 

POWERS OF COMMISSION—COMMISSION TO REPORT TO CONGRESS. 

Sec. 18. That it shall be the duty of this commission to inquire into and report 
to Congress at the earliest date practicable what changes are necessary or desirable in 
the monetary system of the United States or in the laws relating to banking and cur¬ 
rency, and for this purpose they are authorized to sit during the sessions or recess of 
Congress, at such times and places as they may deem desirable, to send for persons and 
papers, to administer oaths, to summons and compel the attendance of witnesses, and 
to employ a disbursing officer and such secretaries, experts, stenographers, messengers, 
and other assistants as shall be necessary to carry out the purposes for which said com¬ 
mission was created. The commission shall have the power, through subcommittee or 
otherwise, to examine witnesses and to make such investigations and examinations in 
this or other countries of the subjects committed to their charge as they shall deem 
necessary. 


EXPENSES OF COMMISSION. 

Sec. 19. That a sum sufficient to carry out the purposes of sections seventeen 
and eighteen of this act, and to pay the necessary expenses of the commission and its 
members, is hereby appropriated, out of any money in the Treasury not otherwise 
appropriated. Said appropriation shall be immediately available and shall be paid 
out on the audit and order of the chairman or acting chairman of said commission, 
which audit and order shall be conclusive and binding upon all departments as to the 
correctness of the accounts of such commission. 

WHEN ACT EXPIRES BY LIMITATION. 

Sec. 20. That this act shall expire by limitation on the thirtieth day of June, 
nineteen hundred and fourteen. 

This commission was immediately organized and continued to do 
sporadic work until March, 1912, when it was dissolved by virtue of 
an act of Congress passed in the preceding August, just before the 
close of the special session of Congress summoned by President Taft 
for the discussion of the reciprocity question. Persons employed by 
the National Monetary Commission prepared a large series of books 
on various historical and current phases of the banking question, but 
the only significant feature of its work is found in a bill drafted under 
the auspices of the commission and finally laid before Congress with 
a brief accompanying report giving the reasons for the measure. This 
measure was at once introduced into Congress by Senator Theodore E. 
Burton, himself a member of the commission, and was referred to 
the Senate Finance Committee, but never received official considera- 
tion. 

The monetary commission provided for as just described spent a 
large sum of money in costly travels, including journeys to Europe and 
outlays for printing. In answer to a request for information made by 
the Senate in 1911, Secretary MacVeagh, then in charge of the Treas¬ 
ury Department, sent to the House a letter in which he fixed the 
cost of the commission to May 12, 1911, at $207,130. 


10 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


VALUE OF COMMISSION’S WORK. 

The work done at such great cost should not, indeed can not, be 
ignored, but, having examined the extensive literature published by 
the commission, the Banking and Currency Committee finds little 
bearing upon the present state of things in the credit market of the 
United States. Most of the matter published by the commission is 
a revision or recasting of books and documents having only historical 
value or brought down to modern times by their authors or others. 
There is practically nothing of original value or of direct aid bearing 
upon the details of remedial legislation. 

The bill favored by the commission and popularly known as the 
Aldrich bill, from the name of the chairman of the monetary com¬ 
mission, ex-Senator Nelson W. Aldrich, of Rhode Island, remains as 
the chief distinct trace of the commission’s existence. It has not 
commended itself to the Banking and Currency Committee. The 
Aldrich bill is a lengthy and elaborate statute and no sufficient account 
of its contents or of the reasons for refusing to accept it can be given 
in brief space. Something, however, may be said of it. This bill has 
often been spoken of as a poisonous theoretical novelty and at other 
times as an ingenious scheme to create a central bank which would 
absorb all banking functions to itself. In fact it was neither of these 
things. Little of novel character is found in the ideas underlying the 
Aldrich bill. To mention only two of the many proposals embodying 
the same general ideas as those held by the framers of the Aldrich 
bill, the plans for banking and currency legislation suggested by Hon. 
Charles N. Fowler in his “A financial and banking system for the 
United States” (H. R. 23707,60th Cong., IstSess.), and by Hon. Maurice 
L. Muhleman, in his “Plan for a central bank,” reprinted from the 
Banking Law Journal, have the same purpose in view. They differ 
in several important details, none of which, however, is absolutely 
fundamental to the scheme presented. 

The objects technically aimed at in all these measures were desir¬ 
able and the criticism to be made of the Aldrich bill does not, in the 
opinion of the committee, reside in its confessed purposes, but in the 
methods by which it undertook to carry them out and the disregard 
of public welfare by which it was characterized. 

The Aldrich bill was not a plan for a central bank as that term is 
properly used. It called for the creation of a national reserve asso¬ 
ciation which was to do business only with banks, while the Govern¬ 
ment had but little power over the institution and the public neither 
business nor other relations with it. Without going further into the 
detailed analysis of the Aldrich bill it may be stated that the com¬ 
mittee objects to the plan fundamentally on the following points: 

1. Its entire lack of adequate governmental or public control of the 
banking mechanism it sets up. 

2. Its tendency to throw voting control into the hands of the larger 
banks of the system. 

3. The lack of adequate provision for protecting the interests of 
small banks and the tendency to make the proposed institution sub¬ 
serve the purposes of large interests only. 

4. The intricate system by which the reserve institution it created 
was prevented from doing any business that might compete with that 
of existing banks. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 11 

5. The extreme danger of inflation of currency inherent in the 
scheme. 

6. The clumsiness of the whole mechanism provided by the measure. 

7. The insincerity of the bond-refunding plan provided for by it, 
there being a barefaced pretense that this system was to cost the 
Government nothing. 

8. The dangerous monopolistic aspects of the bill. 

ESSENTIAL FEATURES OF REFORM. 

The other plans before the committee or examined by it have like¬ 
wise been found unsatisfactory—some for reasons analogous to those 
which made the Aldrich bill unacceptable, others because of defective 
detail, erroneous principle, or faulty construction. An effort was, 
however, made to ascertain the constituent elements of these meas¬ 
ures and of the Aldrich bill, common to all, which should be recognized 
and provided for in any new plan because representing the funda¬ 
mentals of legislation. It is believed that these are as follows: 

1. Establishment of a more nearly uniform rate of discount through¬ 
out the United States, and thereby the furnishing of a certain kind of 
preventive against overexpansion of credit which should be similar 
in all parts of the country. 

2. General economy of reserves in order that such reserves might 
be held ready for use in protecting the banks of any section of the 
country and for enabling them to go on meeting their obligations 
instead of suspending payments, as so often in the past. 

3. Furnishing of an elastic currency bv the abolition of the exist¬ 
ing bond-secured note issue in whole or in part, and the substitution 
of a freely issued and adequately protected system of bank notes 
which should be available to all institutions which had the proper class 
of paper for presentation. 

4. Management and commercial use of the funds of the Govern¬ 
ment which are now isolated in the Treasury and subtreasuries in 
large amounts. 

5. General supervision of the banking business and furnishing of 
stringent and careful oversight. 

6. Creation of market for commercial paper. 

Other objects are sought, incidentally, in these plans, but they are 
not as basic as the chief purposes thus enumerated. 

The first problem in developing a measure was*, of course, the con¬ 
sideration of various alternative courses which might be pursued. 

CENTRAL BANK QUESTION. 

At the outset of the committee’s work it was met by a well-defined 
sentiment in favor of a central bank. This idea appeared to have 
become rooted with a large section of the banking community, and 
was the manifest outgrowth of the work that had been done by the 
National Monetary Commission, and those who believed that the 
recommendations 'of that body were well founded. While the insti¬ 
tution which would have been created by the National Monetary 
Commission bill was not a central bank in the technical sense of the 
term, inasmuch as it did not do a general banking business, it was 
a central bank in many of the aspects that are usually regarded as 


12 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


characteristic of that term. The idea of the monetary commission 
bill had been accepted with great fervor by those who believed that 
the use of a centralization principle was necessary, as well as by others 
who deemed that their own objects would be served by the particular 
form that had been given to the proposal of the monetary commission 
in its bill. 

Without allowing itself to entertain any prepossessions either for 
or against the central bank idea, the committee carefully examined 
this notion both at hearings and through private study. It reached 
in general the following conclusions: 

1. The idea of centralization or cooperation, or combined use of 
banking resources, is the basic idea at the root of central banking 
argument. 

2. It is not necessary in order to obtain the benefits of the applica¬ 
tion of this idea that there should be one single central bank whose 
activities should be coterminous with the limits of a nation's ter¬ 
ritory. 

3. Equally good results can be obtained by the federating of exist¬ 
ing banks and banking institutions in groups sufficiently large to 
afford the strength or cooperating power which is the chief advantage 
of the centralization. 

4. In the United States, with its immense area, numerous natural 
divisions, still more numerous competing divisions, and abundant 
outlets to foreign countries, there is no argument either of banking 
theory or of expediency which dictates the creation of a single central 
banking institution, no matter how skillfully managed, how carefully 
controlled, or how patriotically conducted. 

5. It is therefore necessary to abandon the idea of a single central 
banking mechanism for the United States unless it shall be found 
that there are considerations of expediency which would dictate a 
resort to this policy. 

6. For reasons which will be stated at a later point the conviction 
was formed not only that there are no such reasons of expediency, 
but that every consideration of that character would lead to action 
of an opposite nature. 

It was therefore decided that throughout its efforts to formulate a 
banking measure there should be no necessary attempt to base the 
result of the bill upon the central banking idea. Only in so far as 
that idea indicated an easy and natural adjustment to existing insti¬ 
tutions and conditions was it to be given a place in the ultimate 
findings. 

BRANCH BANKING SYSTEM. 

Many bills have been introduced into Congress from time to time 
for the establishment of branches of existing national banks, and the 
system has so widespread and respectable a support as to make it 
apparent from the outset that this aspect of banking theory and prac¬ 
tice should be considered. The eminent success of the Canadian 
banking system and of others similar to it enforces upon the most 
indifferent student of the subject the significance of branch banking 
as a means of securing cooperation and the junction of resources in 
support of any weak element in a banking system that may have 
been subjected to attack at a given moment. It is clear that Canada, 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 13 

for example, with her 27 banks and thousands of branch banks, rep¬ 
resents a distinctly different type of banking from that which is 
exemplified by the national banking system with its 7,473 independ¬ 
ent banks, none of which possesses a single branch formed under the 
national banking act. The question was thus clearly to be considered 
whether the bestowal of the branch power would in fact meet the 
difficulties of the present situation in the United States. Careful 
study of the applicability of the Canadian banking system to Amer¬ 
ican conditions convinced the committee that an adaptation of it 
would not be feasible to-day. The successful introduction of the 
branch system would almost necessarily have meant the abandon¬ 
ment of the idea of free banking. While it would not necessarily 
have been requisite to abandon free banking in theory in order to 
introduce the Canadian principle, it would have been practically true 
that the power of establishing branch banks, if widely exercised by 
large national institutions, would have entailed the contracting of 
the number of independent banks in the United States and a corre¬ 
sponding limitation of the perfect freedom of competition which 
exists to-day. Certainly it would not have been possible to introduce 
the principles of the Canadian system into American banking without 
a very extensive and vital modification of banking legislation and 
conditions in the United States. That the country was prepared 
for so profound a modification, not to say transformation, of the basic 
ideas upon which the national banking system has been developed 
the committee did not believe and it was therefore led to the aban¬ 
donment of all thought of attempting a plan of banking reform based 
upon the conception of large privately managed institutions operating 
unrestrictedly and with great numbers of branches. This conclusion 
did not, of course, imply any belief that the adoption of other features 
of the Canadian system which seemed applicable and could be easily 
grafted upon our own system was undesirable. It was a conclusion 
relating simply to one of the general ideas underlying the structure 
of Canadian banking. 

QUESTION OF NOTE ISSUES. 

Very early in its inquiries the committee was necessarily con¬ 
fronted with the question whether a mere reconstruction of the note- 
issue system of the United States would suffice to furnish the basis 
for banking reform. Ten years ago and earlier, the dominant note 
in banking reform literature seemed to be that of elasticity in cur¬ 
rency, and it was frequently urged by men of widely different political 
beliefs and of totally varying views as to the theory of money and 
banking that the whole problem was essentially a matter of currency 
issue. The bankers who urged the creation of an asset currency and 
the public men who recommended the issuance of additional United 
States notes or Treasury notes, whether protected or unprotected, 
were fundamentally alike in their belief that the whole trouble with 
existing banking lay in a difficulty in securing proper supplies of 
currency when needed and of withdrawing them when not needed. 

A careful study of this phase of banking discussion convinced the 
committee most unmistakably that those who would regard the 
banking and credit problem as soluble through the proper treatment 
of the paper currency question solely were accepting a superficial 


14 CHANGES IN THE BANKING AND CUEEENCY SYSTEM. 

view of the real elements of the difficulty. As is well known, the 
bank extends its credit in two forms, either (1) by the granting of a 
book credit or u deposit” or (2) by the issuing of notes. There is no 
essential difference between these two forms of credit, if they are 

E rotected by similar reserve funds, except that they are likely to 
ave a different term of existence, the deposit credit being ordinarily 
redeemed much more rapidly and efficiently than even the most 
elastic note issues. To provide therefore for a free issue of note cur¬ 
rency, whether by the Government or by the banks, would not meet 
the need for a more effective supply of deposit credits. In times of 
stress the difficulty under which banks labor is not usually that of 
lack of assets, but is that of inability to convert good assets into a 
medium that can be used in making payments. However desirable 
it might be to be able to turn sound and liquid commercial assets into 
a note currency payable to anyone willing to receive it, and however 
desirable it might be to obtain a free issue of Government legal-tender 
notes obtainable by any individual who might possess property of 
specified classes, such notes would plainly not meet the needs of those 
who desired the book form of credit. While they might indeed be 
converted into book credit by depositing them with the banks, such 
a course would have entailed many incidental consequences that 
should not have been made prerequisite to the obtaining of means of 
payment. It was felt therefore that a return to the older conception 
of banking reform as being primarily a problem of securing easily 
expansible supplies of notes would not meet the needs of the situation 
to-day, and even though it should prove to be of some temporary 
value in times of special stress would not constitute that permanent 
and reliable support to business credit that was sought. It was 
therefore concluded that while a proper issue of note currency should 
necessarily be included as a feature in any measure to be recom¬ 
mended it could not be taken as the sole or even the primary purpose 
of such legislation. 

CLEARING-HOUSE ORGANIZATION. 

Another type of plan that has been frequently urged by students 
of banking conditions in the United States is that of clearing-house 
organization. It has been suggested that inasmuch as the clearing¬ 
house associations of the country represent a kind of voluntary 
association among bankers—one, too, that has already been frequently 
and successfully availed of in time of stress—it would be well worth 
while to endeavor to base such new organization as might be favored 
upon the clearing houses of the country. Various plans for this 
purpose have been worked out with more or less success. The 
Aldrich-Vreeland law, already frequently referred to, was a partial 
application of this idea although before the act was finally adopted 
it had become necessary to modify in very great degree the original 
clearing-house principles upon which the plan was in the first instance 
founded. Most such plans have proceeded upon the theory that it 
was entirely feasible to compel banks to join national clearing-house 
associations which should be incorporated and over which the Govern¬ 
ment should exercise a measure of control. To these incorporated 
clearing houses, it has been suggested, could be committed the func¬ 
tion of issuing “emergency currency” based upon the joint assets 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 15 

of the banks, thus providing for regular and authorized employment 
of the method of credit extension which has been made use of in 
times past when stringent conditions had developed themselves in 
the banking community. It has not been deemed wise upon ex¬ 
amination to attempt any device of this sort. If the clearing houses 
as thus recognized and authorized perform their functions of credit 
extension only occasionally and sporadically they remain an emer¬ 
gency expedient. The committee is convinced that what is needed 
is not a means of remedying emergencies after they have arisen but 
a plan for guarding against the development of such emergencies 
and for so protecting the community that it will not be under the 
necessity of calling for the use of abnormal devices in its interest. 
If the clearing-house associations referred to should be organized 
upon a permanent basis with a view to making such extensions of 
credit as a regular and normal incident of business, they would not in 
any material respect differ from banking institutions. The retention 
of the name “clearing houses” would then be misleading and could 
not be defended. From no point of view, therefore, has the plan 
suggested commended itself. This does not signify that the idea of 
cooperative effort embodied in the clearing-house plan is unsatis¬ 
factory, but, as will be seen later, quite the contrary. It does mean 
that the use of existing clearing-house machinery for the purpose of 
granting accommodation under exceptional conditions does not seem 
to the committee to be a wise method of providing the credit resources 
that are needed in affecting a thorough reform of the banking and 
currency system of the country. 

OTHER PLANS INADEQUATE. 

Of the multitude of other plans, some beyond the confines of rea¬ 
sonableness, others more or less conforming to actual necessities and 
to legitimate principles of banking and currency legislation, nothing 
needs be said except that none has been found which, in the opinion 
of the committee, is at the same time feasible, available, trustworthy, 
and sufficiently inclusive to afford a thorough basis of reform of the 
present conditions. The committee does not feel that the legisla¬ 
tion now to be adopted should seek to include within its scope all 
the possible features upon which action is required, but rather that 
it should attempt to lay a foundation for future development by 
selecting those elements in the situation that are most in need of 
attention and seeking to deal thoroughly with the problems offered 
in this more restricted field of action. It has therefore put aside 
many schemes of reform which, however desirable they might ab¬ 
stractly be, do not conform to the standards already outlined. It 
has limited itself to the fundamental necessities of the present situa¬ 
tion as it views them and has sought to keep its recommendations 
within narrow scope in order that no extraneous issues might become 
involved with the general problem which lies at the base of further 
improvement. It has deferred the thorough reform of the national- 
bank act on its administrative side, and it has determined to post¬ 
pone, in like manner, the question of long-term agricultural credit, 
firmly believing that neither of these subjects can be adequately 
dealt with untff the substructure of banking organization has been 
remodeled. 


16 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


FUNDAMENTAL FEATURES OF REFORM. 

After looking over the whole ground, and after examining the 
various suggestions for legislation, some of which have just been 
outlined, the Committee on Banking and Currency is firmly of the 
opinion that any effective legislation on banking must include the 
following fundamental elements, which it considers indispensable in 
any measure likely to prove satisfactory to the country: 

1. Creation of a joint mechanism for the extension of credit to banks 
which possess sound assets and which desire to liquidate them for 
the purpose of meeting legitimate commercial, agricultural, and 
industrial demands on the part of their clientele. 

2. Ultimate retirement of the present bond-secured currency, with 
suitable provision for the fulfillment of Government obligations to 
bondholders, coupled with the creation of a satisfactory flexible 
currency to take its place. 

3. Provision for better extension of American banking facilities 
in foreign countries to the end that our trade abroad may be enlarged 
and that American business men in foreign countries may obtain the 
accommodations they require in the conduct of their operations. 

Beyond these cardinal and simple propositions the committee has 
not deemed it wise at this time to make any recommendations, save 
that in a few particulars it has suggested the amendment of existing 
provisions in the national-bank act, with a view to strengthening that 
measure at points where experience has shown the necessity of 
alteration. 


PROPOSED PLAN. 

In order to meet the requirements thus sketched, the committee 
proposes a plan for the organization of reserve or rediscount institu¬ 
tions to which it assigns the name ‘‘Federal reserve banks.” It rec¬ 
ommends that these be established in suitable places throughout the 
country to the number of 12 as a beginning, and that they be assigned 
the function of bankers’ banks. Under the committee’s plan these 
banks would be organized by existing banks, both National and State, 
as stockholders. It believes that banking institutions which desire 
to be known by the name “national” should be required, and can 
well afford, to take upon themselves the responsibilities involved in 
joint or federated organization. It recommends that these bankers’ 
banks shall be given a definite capital, to be subscribed and paid by 
their constituent member banks which hold their shares, and that 
they shall do business only with the banks aforesaid, and with the 
Government. Public funds, it recommends, shall be deposited in 
these new banks which shall thus acquire an essentially public char¬ 
acter, and shall be subject to the control and oversight which is a 
necessary concomitant of such a character. In order that these 
banks may be effectively inspected, and in order that they may pur¬ 
sue a banking policy which shall be uniform and harmonious for the 
country as a whole, the committee proposes a general board of man¬ 
agement intrusted with the power to overlook and direct the general 
functions of the banks referred to. To this it assigns the title of 
“The Federal reserve board.” It further recommends that the 
the present national banks shall have their bonds now held as security 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 17 

for circulation paid at the end of 20 years, and that in the meantime 
they may turn in these bonds by a gradual process, receiving in 
exchange 3 per cent bonds without the circulation privilege. 

In lieu of the notes, now secured by national bonds and issued by 
the national banks, and, so far as necessary in addition to them, the 
committee recommends that there shall be an issue of “ Federal 
reserve Treasury notes,” to be the obligations of the United States, but 
to be paid out solely through Federal reserve banks upon the applica¬ 
tion of the latter, protected by commercial paper, and with redemp¬ 
tion assured through the holding of a reserve of gold amounting to 
33J per cent of the notes outstanding at any one time. In order to 
meet the requirements of foreign trade, the committee recommends 
that the power to establish foreign branch banks shall be bestowed 
upon existing national banks under carefully prescribed conditions 
and that Federal reserve banks shall also be authorized to establish 
offices abroad for the conduct of their own business and for the pur¬ 
pose of facilitating the fiscal operations of the United States Govern¬ 
ment. Finally and lastly, the committee suggests the amendment of 
the national-bank act in respect to two or three essential particulars, 
the chief of which are bank examinations, the present conditions 
under which loans are made to farming interests, and the liability of 
stockholders of failed banks. It believes that these recommendations, 
if carried out, will afford the basis for the complete reconstruction 
and the very great strengthening and improvement of the present 
banking and credit system of the United States. The chief evils of 
which complaint has been made will be rectified, while others will at 
least be palliated and put in the way of later elimination. 

FEDERAL RESERVE BANKS. 

The Federal reserve banks suggested by the committee as just 
indicated would be in effect cooperative institutions, carried on for 
the benefit of the community and of the banks 'themselves by the 
banks acting as stockholders therein. It is proposed that they shall 
have an active capital equal to 10 per cent of the capital of existing 
banks which may take stock in the new enterprise. This would 
result in a capital of something over $100,000,000 for the reserve 
banks taken together if practically all existing national banks 
should enter the system. It is supposed, for a number of reasons, 
that the banks would so enter the system. More will be said on this 
point later in the discussion. How many State banks would apply 
for and be granted admission to the new system as stockholders in 
the reserve banks can not be confidently predicted. It may, how¬ 
ever, be fair to assume at this point that the total capital of the 
reserve banks will be in the neighborhood of $100,000,000. The bill 
recommended by the committee provides for the transfer of the 
present funds of the Government included in what is known as the 
general fund to the new Federal reserve banks, which are there¬ 
after to act as fiscal agents of the Government. The total amount 
of funds which would thus be transferred can not now be predicted 
with absolute accuracy, but the released balance in the general fund 
of the Treasury is not far from $135,000,000. Certain other funds 
now held in the department would in the course of tune be transferred 

SS29°—H. Kept. 69, 63-1-2 


18 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


to the banks in this same way, and that would result in placing, 
according to the estimates of good authorities, an ultimate sum of 
from $200,000,000 to $250,000,000 in the hands of the reserve banks. 
If the former amount be assumed to be correct, it is seen that the 
reserve banks would start shortly after their organization with a cash 
resource of at least $300,000,000. As will presently be seen in greater 
detail, it is proposed to give to the reserve banks reserves now h^ld 
by individual banks as reserve holders under the national banking 
act for other banks. Co iflning attention to the national system, it 
is probable that the transfer of funds thus to be made by the end of 
a year from the date at which the new system would be organized 
would be in the neighborhood of $350,000,000. If State banks 
entered the system and conformed to the same reserve requirements 
they would proportionately increase this amount, but for the sake of 
conservatism the discussion may be properly confined to the national 
banks. For reasons which will be stated at a later point, it seems 
likely that at least $250,000,000 of the reserves just referred to would 
be transferred to the reserve banks in cash; and if this were done the 
total amount of funds which they would have in hand would be at 
least $550,000,000. This would create a reservoir of liquid funds far 
surpassing anything of similar kind ever available in this country 
heretofore. It would compare favorably with the resources possessed 
by Government banking institutions abroad. 

It will be observed that in what has just been said the reserve banks 
have been spoken of as if they were a unit. The committee, however, 
recommends that they shall be individually organized and indivi lu- 
ally controlled, each holding the fluid funds of the region in which it 
is organized and each ordinarily dependent upon no other part of the 
country for assistance. The only factor of centralization which has 
been provided in the committee’s plan is found in the Federal reserve 
board, which is to be a strictly Government organization created for 
the purpose of inspecting existing banking institutions and of regu¬ 
lating relationships between Federal reserve banks and between them 
and the Government itself. Careful study of the elements of the 
problem has convinced the committee that every element of advan¬ 
tage found to exist in cooperative or central banks abroad can be 
realized by the degree of cooperation which will be secured through 
the reserve-bank plan recommended, while many dangers and possi¬ 
bilities of undue control of the resources of one section by another 
will be avoided. Local control of banking, local application of 
resources to necessities, combined with Federal supervision, and lim¬ 
ited by Federal authority to compel the joint application of bank 
resources to the relief of dangerous or stringent conditions in any 
locality are the characteristic features of the plan as now put for¬ 
ward. The limitation of business which is proposed in the sections 
governing rediscounts, and the maintenance of all operations upon 
a footing of relatively short time will keep the assets of the proposed 
institutions in a strictly fluid and available condition, and will insure 
the presence of the means of accommodation when banks apply for 
loans to enable them to extend to their clients larger degrees of as¬ 
sistance in business. It is proposed that the Government shall retain 
a sufficient power over the reserve banks to enable it to exercise a 
directing authority when necessary to do so, but that it shall in no way 
attempt to carry on through its own mechanism the routine opera- 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


19 


tions of banking which require detailed knowledge of local and indi¬ 
vidual credit and which determine the actual use of the funds of the 
community in any given instance. In other words, the reserve-bank 
plan retains to the Government power over the exercise of the 
broader banking functions, while it leaves to individuals and pri¬ 
vately owned institutions the actual direction of routine. 

TRANSFER OF RESERVES. 

Reference has been briefly made to the fact that the committee’s 
proposals provide for the transfer of bank reserves from existing 
banks which hold them for others to the proposed reserve banks. 
At present the national banking act recognizes three systems of 
reserves: 

(1) Those in central reserve cities, where banks are required to 
hold 25 per cent of their deposit liabilities in actual cash in the vaults, 
while banks situated outside of such cities are allowed to make certain 
deposits with them which shall count as a part of the reserves of 
such outside banks. 

(2) Those in reserve cities, 47 in number, which are required to 
keep a nominal reserve of 25 per cent, 12^ per cent of this being in 
cash in their own vaults, while 12^ per cent may consist of deposits 
with banks in central reserve cities. 

(3) Those in the “ country,” by which is meant all places outside 
of central reserve and reserve cities, it being required that such banks 
shall nominally keep 15 per cent of their deposit liabilities, of which 
6 per cent is held in cash in their vaults and 9 per cent may be held 
in the form of balances with other banks in reserve and central 
reserve cities. 

The original reason for creating this so-called “pyramidal” system 
of reserves was that inasmuch as central banking institutions were 
absent, and inasmuch as banks outside of centers were obliged to 
keep exchange funds on deposit with other banks in such centers, it 
was fair to allow exchange balances with such centrally located banks 
to count as reserves inasmuch as they were presumably at all times 
available in cash. This is an absolutely anomalous and unique 
system, found nowhere outside of the United States, and dangerous 
in proportion as the number of the reserve centers thus recognized 
increases beyond a prudent number. The law has almost necessarily 
been liberal in recognizing the power to increase the number of such 
centers, with the result that whereas but few existed just after the 
organization of the national bank act, there being then 3 central 
reserve and 13 reserve cities, there are to-day 3 central reserve 
and 47 reserve cities. Even had this extension of the number of 
centers not occurred, the system established under the national 
banking act would still have been unsatisfactory. As matters have 
developed, it has been vicious in the extreme. Coupled with the 
inelasticity of the bank currency, the system has tended to create 
periodical stringencies and periodical plethoras of funds. Banks in 
the country districts unable to withdraw notes and contract credit 
when they have seen fit to do so, because of the rigidity of the bond- 
secured currency, have redeposited such funds with other banks in 
reserve and central reserve cities and have thus built up the balances 
which they were entitled to keep there as a part of their reserves. 


20 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

Moreover, the practice of thus redepositmg funds having been once 
established, it has been carried to extreme lengths, and at times has 
been decidedly injurious in its influence. The payment of interest 
on deposits by banks in the centers has been used for the purpose of 
attracting to such banks funds which otherwise would have gone 
to other centers or to other banks in the same centers or which 
would have been retained at home. The funds thus redeposited, 
even when not attracted by any artificial means, have of course 
constituted a demand liability, and have been so regarded by the 
banks to which they were intrusted. 

In consequence, such banks have sought to find the most profitable 
means of employment for their resources and at the same time to 
have them in such condition as would permit their prompt realization 
when demanded by the depositing banks which put them there. 
The result has been an effort on the part of the national banks, par¬ 
ticularly in central reserve cities, to dispose of a substantial portion 
of their funds in call loans protected by stock-exchange collateral as 
a rule. This was on the theory that, inasmuch as listed stock- 
exchange securities could be readily sold, call loans of this type were 
for practical purposes equivalent to cash in hand. The theory is 
of course close enough to the facts when an effort to realize is made 
by only one or few banks, but is entirely erroneous whenever the 
attempt to withdraw deposits is made by a number of banks simul¬ 
taneously. At such times, the banks in central reserve and reserve 
cities are wholly unable to meet the demands that are brought to 
bear on them by country banks; and the latter, realizing the difficul¬ 
ties of the case, seek to protect themselves by an unnecessary accumu¬ 
lation of cash which they draw from their correspondents, thereby 
weakening the latter and frequently strengthening themselves to an 
undue degree. Under such circumstances the reserves of the country, 
which ought to constitute a readily available homogeneous fund, 
ready for use in any direction where sudden necessities may develop, 
are in fact scattered and entirely lose their efficiency and strength 
owing to their being diffused through a great number of institutions 
in relatively small amount and thereby rendered nearly unavailable. 
This evil has been met in times past by the suspension of specie pay¬ 
ments by banks and by the substitution of unauthorized and extra- 
legal substitutes for currency in the form of cashiers’ checks, clearing¬ 
house certificates and other methods of furnishing a medium of 
exchange. Needless to say such a method of meeting the evil is the 
worst kind of makeshift and is only somewhat better than actual 
disaster. 

HOLDING OF FUNDS. 

The committee believes that the only way to correct this condition 
of affairs is to provide for the holding of reserves by duly qualified 
institutions which shall act primarily in the public interest and wdiose 
motives and conduct shall be so absolutely well known and above 
suspicion as to inspire unquestioning confidence on the part of the 
community. It believes that the reserve banks which it proposes to 
provide for will afford such a type of institutions and that they may 
be made the effective means for the holding of the liquid reserve 
funds of the country to the extent that the latter are not needed in 
the vaults of the banks themselves. To meet this end it proposes 


CHANGES IN THE BANKING AND CTTBBENCY SYSTEM. 21 


that every bank which shall become a stockholder in the new reserve 
banks shall place with the Federal reserve bank of its district a por¬ 
tion of its own reserve equal ultimately to 5 per cent of its demand 
deposits. Country banks would be required to keep 5 per cent in 
their own vaults, while the remaining 2 of a required total of 12 per 
cent might be at home or in the reserve bank of the district. In the 
case of reserve and central reserve cities the committee has felt that 
the change in their position as reserve-holding banks acting for other 
banks called for a corresponding change in the cash to be held by 
these banks. It has therefore reduced the gross reserve requirements 
from 25 to 18 per cent of deposits and the cash in vault requirement 
from 25 per cent in the central reserve cities to 9 per cent and from 
12 J per cent in the reserve cities to 9. This places the two classes of 
reserve cities on an equal basis, leaves each ultimately with 9 per cent 
cash, requires each to keep 5 per cent in the reserve bank of the district, 
and permits each to keep a final 2 or 4 per cent either there or in its 
own vaults. 

A period of three years is granted during which the deposits of 
country banks may be kept with the present correspondent banks in 
order that the latter may not be unduly embarrassed by sudden 
withdrawals while the new reserve banks will not be as suddenly 
compelled to provide for using a very large quantity of funds. The 
committee is aware that the step thus recommended is of funda¬ 
mental importance and will produce an extensive transformation in 
present methods of national banking. It, however, believes that the 
effects of this transformation will be altogether beneficial and is 
confident that the conditions under which the change is to take place 
as provided in the new bill are such as to make the transfer not only 
without suffering to the banks but under conditions that will actually 
enable them to extend further loans to the community. The actual 
effects of the operation proposed have been worked out in some 
detail by the committee and are presented as a series of computa¬ 
tions in connection with the section of the proposed bill which pro¬ 
vides for the revision of reserve requirements. Final analysis of these 
figures may be deferred until that point. It is enough to say at this 
point that a sufficient amount of reserve has been released, as com¬ 
pared with present requirements, amply to provide for the actual 
transfer of funds called for by the bill at the outset of the new system. 
Subsequent transfers will amount only to about enough to place the 
new system upon the same basis as the old in the matter of reserve 
requirements, when a margin has been allowed for contributions of 
capital and for possible accessions of State banks to the system. 
Or, to sum up, the new system will require less cash than the present 
one in order to fulfill its reserve requirements and provide for the 
payment of capital subscriptions. The margin between present and 
proposed requirements which it is thought should be left in order 
that State banks may come into the system without causing any 
strain upon the cash resources of the country will probably be from 
$100,000,000 to $150,000,000, a sum which is believed to be ample. 
Needless to say the new reserve requirements will not fall upon all 
banks in precisely the same way or with precisely the same degree of 
severity. In the case of some it may be that a transfer of cash to 
the new system will be undesirable. In such an event it is, of course, 
always open to the banks to establish their required reserve credit with. 


22 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


the new Federal reserve banks by rediscounting paper with them. 
With the enormous resources that will belong to these reserve banks 
at the outset they will be amply able to take care of many times the 
amount of any such applications that are likely to be made to them. 

RETIREMENT OF BOND-SECURED CURRENCY. 

There are several important reasons for the retirement of bond- 
secured currency. The most obvious is that bond-secured notes are 
not “elastic.” By this is meant that the necessity of purchasing 
bonds to be deposited with a trustee for the protection of note issues 
prevents banks from issuing these notes as freely and promptly as 
they otherwise would, while it also prevents them from retiring or 
contracting the notes as freely and promptly as would otherwise be 
the case. There is little or no disagreement at present among stu¬ 
dents of the banking and currency problem in the United States that 
the retirement of the bond-secured notes is essentially necessary if 
success is to be had in restoring elasticity to the circulation and in 
making the national banking system really responsive to the needs of 
business. For that reason every plan of currency or banking reform 
that has been put forward during the past 15 years has contained as 
an important factor some provision for getting rid of the bond-secured 
notes. The basic criticism on the present system of notes already 
indicated is reenforced by the fact that the supply of United States 
bonds available for use in protecting note issues is likely to be limited, 
as was the case in the panic of 1907. Then the national banks were 
not able to enlarge their issues because of their inability to obtain 
further bonds, until they had been aided by the action of the Govern¬ 
ment in issuing additional bonds for the very purpose of furnishing 
a backing for currency, notwithstanding that at that moment there 
was a very large surplus in the Treasury. Over and above this con¬ 
sideration has been the fact that the formalities and technicalities 
connected with the issue of bank notes based upon bonds have been 
so great and troublesome as to preclude the easy and prompt supply¬ 
ing of currency, even when there weie enough bonds in the market 
to furnish all the backing for notes that might be desired. This shows 
why, apart from the special and peculiar difficulties that attend any¬ 
thing of the sort, the substitution of bonds other than national for 
the national bonds now used will not help the situation. The only 
way to relieve the bad conditions that have developed in connection 
with national-bank currency is, therefore, generally admitted to be 
the abandonment of the bond-security plan and the introduction of 
something else in its place. 

DIFFICULTY OF BOND HOLDINGS. 

The first difficulty in passing from the bond-secured system of 
note issues to anything that might be devised to take its place is the 
fact that even if all had been satisfactorily arranged with reference 
to the new system, its soundness, etc., the difficulty of dealing with 
the bonds would remain. The act of March 14, 1900, provided for 
refunding the outstanding bonds into the 2 per cent consolidated debt 
and these 2 per cent bonds were subsequently sold at premiums 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 23 


which once ran as high as 8 or 9 per cent and have regularly been 2 or 
3 per cent or more. Primarily as a result of general depreciation in 
the values of bonds due to rising prices and higher interest for capi¬ 
tal, the national bond quotations have sunk until the 2 per cents are 
now below par. The ownership of bonds has thus inflicted a severe 
loss upon holders already, and something like $30,000,000 has, ac¬ 
cording to the Comptroller of the Currency, beerf “written off” by 
the banks and must be regarded as one of the costs of carrying the 
note system at present in use. There is general agreement that if the 
circulation privilege were to be taken from t’e 2 per cent bonds or, 
what is the same thing, if a new system of note issue were to be 
established which would practically displace the present system, the 
twos would deteriorate to a price not higher than 80. This would 
mean a shrinkage of one-fifth of the par value of the bonds and would 
inflict upon the banks an aggregate loss of nearly $150,000,000. 
Alternative to this is the idea of providing for a refunding of the 
bonds. Experience, as well as computations made in the Treasury, 
indicate that 3 per cent is now about the level of the Government's 
present borrowing power. The $50,000,000 Panama bonds last sold 
brought a premium of between 2 and 3 per cent, but 3 per cent 
interest without the circulation privilege represents the minimum 
interest that must be paid (in round numbers) upon any future issue 
which is to be floated upon an investment basis. In order to safe¬ 
guard the banks against loss, therefore, a plan of refunding into 3 
per cent bonds would have to be followed. The banks might be 
offered cash payment for their bonds at par, and the new securities 
might be sold for what they would bring, or an exchange of 3 per 
cents for the old twos might be ordered. The latter would be simpler, 
and the former would probably cost a little more. Either plan would 
entail an increase in the present interest burden nearly amounting to 
1 per cent annually on at least $740,000,000, or $7,400,000 a year. 

Temporary alternatives for the retirement of the bonds are, how¬ 
ever, proposed here and there. The most familiar and perhaps the 
most available plan of the sort is that which proposes to require banks 
to have outstanding a certain percentage of notes based on bonds 
before they become eligible to take out notes without bond security. 
This would mean that an inflexible volume of bank notes was kept 
outstanding, or at all events that an inflexible volume of bonds was 
held by the banks to protect such outstanding notes in case they 
should be issued, and that whatever new form of currency might be 
provided for would come out in excess of or in addition to the basic 
volume of notes and bonds already referred to. The plan would 
partially destroy the possibilities of elasticity in the note currency 
system, but at the same time it would operate to keep up the value 
of the existing bonds for the time being. The question would then 
be whether the effort to sustain the value of the bonds in this manner 
during the remainder of their life was not too great to be compensated 
for by the saving in interest thereby effected. The general opinion 
of students of the subject undoubtedly is that this temporary method 
of sustaining the value of the bonds is undesirable, and that it is far 
better to recognize the facts in the case and take up the securities 
in such a way as to relieve the banks from any danger of further 
loss, the Government bearing the increased interest charge and leaving 
the banks to turn in their securities at will. 


24 CHANGES IN THE BANKING ANT) CURRENCY SYSTEM. 


What has been thus far said has been founded upon the assumption 
that agreement had been reached with reference to the method of 
note issue to be followed when once a plan for retiring the old notes 
and disposing of the bonds had been agreed upon. While no such 
agreement has ever been arrived at, it is true that substantial agree¬ 
ment has been reached with reference to the basis on which the notes 
which are to supersede national-bank issues shall be put out. 

Another phase of the note-issue question is seen in connection with 
the problem by whom the notes should be issued. The current 
assumption is that in the event of the creation of any cential or 
cooperative institution the note-issue power now exercised by the 
several banks should be transferred to and vested in this new organi¬ 
zation. There has been a tendency to overestimate the importance of 
the note-issue function and to treat it as if it were the chief object to 
be attained in banking legislation. This idea may be attributable to 
the belief that “emergency currency” is what is needed in order to 
relieve panics and stringencies, whereas what is actually needed is 
fluid resources of some kind, whether notes or not. The belief that 
the notes are very important has also been stimulated by the expe¬ 
rience in this country with clearing-house certificates, which are often 
spoken of as if they were notes. The fact is that they are merely 
evidences that the banks that have gone into the clearing-house 
arrangement are willing to accept a credit substitute for money in 
settling their balances with one another. It remains true that the 
provision of a satisfactory note currency would be a long step in 
advance, as compared with existing conditions. With proper con¬ 
trol and restriction it would, however, supply a means of obtaining 
additional circulating media in time of panic or stringency when there 
was a tendency to hoard money, and would to that extent relieve the 
danger of collapse due to inability to convert assets into fluid resources. 
It is therefore a cardinal element in currency and banking reform and 
should be provided for. 

committee’s note plan. 

After reviewing all of the different factors in the situation, the 
Banking and Currency Committee has reached the conclusion that the 
issueof national-bank notes nowcurrent should,forthe reasons already 
surveyed, be retired despite the serious difficulties that have been 
sketched, and that in their place a new issue of notes put out by the 
Government of the United States and closely controlled by it should 
be authorized. This issue of notes it is proposed to entitle “ Federal 
reserve Treasury notes.” In its essence the plan now recommended 
by the committee for a new note issue contams the following points: 

1. Ultimate withdrawal of the circulation privilege from the Gov¬ 
ernment bonds of all classes. 

2. Issue of notes by the Government through Federal reserve banks 
upon business paper held by such banks. 

3. Redemption of such notes and regulation of their amount out¬ 
standing at any moment through Federal reserve banks. 

The ultimate withdrawal of the circulation privilege means that 
some provision of proper character must be made for the existing 
bonds. It is suggested that, first of all, this should mean the pay¬ 
ment of the bonds at maturity and a definite statement to that effect. 


CHANGES IN THE BANKING AND CUEBENCY SYSTEM. 25 


This the committee has included in its bill. The bonds now have 
no due date, and while the Government may redeem them after 
1930, they are not necessarily payable at that period. If the bonds 
are to be continued outstanding, it would seem to be an essential 
feature of their composition that they shall be allowed to retain the 
circulation privilege. To get rid of this, it is only necessary to declare 
them due and payable as soon as the Government has the right to 
apply that principle. But, in the second place, it would appear that 
the reform of the currency along the lines proposed, if it is ever to 
make a fair start, should proceed from the abolition of the circula¬ 
tion requirement in the case of banks either organized or to be 
organized. The committee has, therefore, proposed to repeal that 
provision of the existing law which requires the deposit of bonds by 
every bank in stated amounts. This means that banks may, if they 
choose, entirely free themselves from circulation. In order to enable 
them to do this, and at the same time to supply the place of the small 
but steady demand for bonds which was afforded by the purchases 
made by newly organized banks, the committee proposes to allow a 
voluntary refunding process to be carried out over a period of 20 
years at the rate of not to exceed one-twentieth of the circulation 
outstanding at the time of the passage of the act. It is probable 
that if this provision were fully availed of it would mean an annual 
refunding of 2 per cent bonds amounting to about $37,500,000. In 
consideration of the action of the banks in surrendering the circula¬ 
tion privilege on the bonds which they thus voluntarily present for 
refunding, it is proposed to give the banks a 3 per cent bond without 
the circulation privilege. This is believed to be an excellent business 
policy for the Government, as it could scarcely borrow at a lower 
rate than 3 per cent to-day. What it will be able to do at the end 
of 20 years is entirely problematical, but it is a fact that the circu¬ 
lation privilege is worth at least 1 per cent, and in surrendering it the 
banks get no undue consideration from the Government. They do, 
however, materially facilitate the process of converting the old 
national-bank notes into the proposed new issue of Federal reserve 
Treasury notes. 


COST TO THE GOVERNMENT. 

That the cost to the Government of this conversion will be 1 per cent 
on the amount converted, or in the last analysis very near $7,500,000, 
if all the bonds should thus be surrendered is obvious; but it is also 
clear that the change would, for reasons stated, be an excellent invest¬ 
ment for the Government. The committee has arranged to give the 
proposed Federal reserve board power to tax the new currency at such 
rate as it might deem best, and should it impose a tax of 1 per cent 
the Government would be reimbursed for any excess interest payments 
which it might be required to make on the new bonds. Over and 
above this plan of recouping itself for any losses is the fact that the 
Government is to receive a substantial share of the earnings of the 
proposed institutions of rediscount. If the plan of the committee 
should be accepted and carried through in complete form, the result 
would be a profitable one for the Government. 

Whatever may be the ultimate earnings of the banks, however, 
the committee is convinced that the conversion of the bonds and the 


26 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

retirement of the present notes, followed by the issue of new notes, 
ought to be effected at all hazards and at any cost, as a fundamentally 
desirable public reform. It believes that the change should be carried 
through upon a frank, open, and direct basis, and that no effort 
should be made to mask, as was done in the Aldrich bill, proposed by 
the Monetary Commission, the real nature of the process or the burden 
and distribution of its cost. 

The committee is of the opinion that in order to have the new cur¬ 
rency at once satisfactory and effective, it must be (a) sound and ( b ) 
elastic. The soundness of the new notes will, in its judgment, be 
amply secured by the fact that they are made obligations of the 
Government and a first lien on the assets of the Federal reserve banks 
issuing them, while they have also been immediately protected by the 
hypothecation of first-class commercial paper in the hands of an 
agent of the Federal reserve board at each of the banks. Their 
elasticity depends entirely upon two fundamental elements — (1) the 
provision of an adequate money fund for their redemption and (2) pro¬ 
vision for the prompt presentation of the notes. The money fund is 
provided by the requirement that no notes shall be issued by a Federal 
reserve bank unless 33 J per cent of money shall have been segregated 
in the vaults of the issuing institution for the purpose of paying such 
notes upon presentation by any holders. The banks are left to pro¬ 
vide this fund, and are both vested with the duty and equipped with 
the power to obtain it and hold it, either by withdrawing it from 
domestic channels or importing it. They are required to redeem the 
Federal reserve Treasury notes, both of their own issue and those 
issued by other Federal reserve banks, whenever the notes may be 
presented to them from any source; while, as a central point of redemp¬ 
tion, it is provided that the Treasury Department shall pay the notes 
out of a fund of money (constituting part of the 33^ per cent referred 
to) which shall be placed in their hands by the several banks. This 
means that the Federal reserve Treasury notes will be redeemable in 
money at each of the 12 banks and at the Treasury, while the require¬ 
ment that the notes shall be payable to the Government and to any 
bank for deposit purposes will be tantamount to a quasi-redemption 
at every point where banking is carried on. In order to insure the 
prompt presentation of the notes for redemption, thereby avoiding 
danger that they may accumulate in the bank vaults, the bill refuses 
to authorize their use as reserve money by member banks, while of 
course they will be excluded from the reserves of Federal reserve 
banks. 

Provision is also made whereby they will be prevented from accu¬ 
mulating in the Treasury or any of its subtreasuries even in small 
quantities. It is believed that these provisions will insure the 
prompt return of the notes, thereby producing genuine flexibility 
in the currency. The notes will be taken out whenever business 
paper eligible for presentation to Federal reserve banks for rediscount 
is created; and as such paper matures, is paid off. and shrinks in 
volume the basis for the notes will correspondingly shrink, and either 
the notes themselves or an equivalent amount of lawful money will 
be withdrawn from circulation. It is an undoubted feature of the 
measure as now drafted that it will furnish an ample mechanism for 
insuring the cancellation of the notes as well as for their issuance. 
While this process is going on, there will have been an active re- 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 27 

demption of the notes, owing to the operation of the provisions for 
exchanging them for money already sketched. 

USE OF GOVERNMENT FUNDS. 

One feature of the proposals for legislation contained in the com¬ 
mittee’s bill is the recommendation that the funds of the Government 
of the United States received by it as a result of current business 
transactions and heretofore held in the Treasury shall thenceforward 
be deposited with the Federal reserve banks, the latter institutions 
to act as fiscal agents for the Government in all of its transactions 
thenceforward. This recommendation is of fundamental importance. 
The Independent Treasury system of the United States under which 
the Treasury Department now carries on its operations dates from 
1846 and is the result of the legislation then urged and adopted for 
the purpose of putting the country upon a so-called hard-money 
basis. vFhatever may be thought of the idea of actual specie pay¬ 
ments and of segregation of Government cash, both when it comes into 
and when it goes out of the Department of the Treasury, experience 
has shown that the system is not feasible. It was necessary to sus¬ 
pend the Independent Treasury system, practically speaking, when 
the Civil War broke out; and upon every subsequent occasion of stress 
or difficulty in the market a repetition of this suspension has become 
practically unavoidable. It has been necessary on those occasions 
to redeposit the funds of the Government in banks in order that the 
commercial community need not be deprived of the use of them even 
for a short time. At times it has been found expedient, if not abso¬ 
lutely necessary, to temporize with the law and with the technical 
requirements of the Treasury system, and practically to abandon 
the plan of requiring cash payments even when that was theoretically 
lived up to—this again in order to avoid any withdrawal of urgently 
needed funds from the business community. 

In normal times the withdrawal of these funds has, of course, been 
far less noticeable in its influence upon the business world, although 
at all times it has been a fact that the withdrawals did disturb in a 
measure the natural balance and distribution of funds between 
different parts of the country and did thereby tend to embarrass 
some parts of the country much more than others, owing to the 
fact that withdrawals of cash due to the payment of taxes were 
neither identical in amount nor proportionate in importance in these 
several sections. The inadequacy of the Independent Treasury sys¬ 
tem and of the present method of making public deposits has indeed 
been fully recognized by Congress when it provided that all such 
deposits in banks should be made only upon security of United 
States bonds, a requirement which means, if it means anything, that 
the banks called national and under congressional supervision, 
although deemed safe enough for the use of the public, are not safe 
enough to serve as depositaries of public funds—a situation which, 
if actually what it seems to be, is both ridiculous and disgraceful. 
This condition of affairs would, however, be greatly aggravated and 
would become even more anomalous if Congress were to authorize 
the creation of a new set of banks intrusted with the power of hold¬ 
ing reserves and acting as the intermediaries through which a new 
currency is issued, yet unable to be trusted as custodians of Gov- 


28 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


ernment funds. Both for economic reasons and because of considera¬ 
tions of the logic and dignity of the situation, it is desirable to have 
the current receipts of the Government deposited in the new banks 
and its disbursements made by drawing upon these institutions. 
The Treasury is in no way interfered with by this process save in 
so far as it is relieved of some routine duty. It is left to manage the 
fiscal affairs of the Government in precisely the way that is now 
practiced, but the actual funds are placed with the Federal reserve 
banks, where they will continue to be available for the banking needs 
of the community which created them and which is responsible for 
the solvency and activity of the business processes that afford the 
basis of taxation and thereby supply the fundamental resources of 
the public Treasury. 


BENEFIT FROM DEPOSITS. 

Too much can not be said of the benefit that will be derived from 
the continuous depositing and withdrawing of public moneys through 
the Federal reserve banks, as compared with the present artificial 
system of periodically contracting currency through heavy with¬ 
drawals due to large payments for customs and internal revenue 
and of periodically expanding the currency through deposits in the 
banks, which, however wisely selected, can never restore the funds 
to exactly the same channels from which they were drawn. A very 
large share of responsibility for the past panics and crises of the 
United States must undoubtedly be assigned to the Treasury system 
which has been responsible for this sporadic and spasmodic movement 
of funds. In unskilled or selfish hands, the power thus bestowed upon 
the executive branch of the Government may be, as it has at times 
become, most dangerous to the public welfare, while it is always a 
source of grave responsibility and danger scarcely to be overestimated 
in its importance. The usual'consideration against placing Govern¬ 
ment funds in the banks has been that by so doing certain banks were 
favored at the expense of others while the Government was deprived 
of its legitimate return upon the moneys that it furnished. Under 
the proposed plan, no such danger exists. Power is given to the 
Federal reserve board and to the Secretary of the Treasury, jointly, 
to establish a rate of interest upon public deposits, thereby rendering 
it possible for the Government, if it chooses, to assure itself a fair 
adequate return for its funds from the very time that they are placed 
in the banks. Under the section of the proposed bill which provides 
for a distribution of earnings the Government of the United States is 
given 60 per cent of all net income after the banks have received 
5 per cent upon their invested capital. The Government is therefore 
in position to get its full and due return for every dollar that it places 
in the hands of the banks, while the community has the use of the 
money thus left subject to the disposal of trade and commerce accord¬ 
ing to their necessities. This is as it should be, since it amply pro¬ 
tects the Government, safeguards the public interest, and assures the 
returns of the profits from the use of the funds to the Government 
after the banks have received the fair going rate of return for carrying 
on their business and performing the routine operations connected 
with their duties as fiscal agents of the Treasury. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


29 


There is another aspect of this Treasury deposit system that de¬ 
serves mention in this connection. The bill provides for the depositing 
of funds not in any one bank, and not in accordance with any system 
that would place the moneys in any particular group of banks, but for 
the depositing of the funds in such banks as from time to time may 
be deemed wise, having due regard to an equitable distribution of 
these moneys among the different sections of the country. The power 
is, however, retained to make redistribution whenever deemed best, 
and this means that the provision is important as an adjunct to the 
power of the Federal reserve board over rediscounts and rates of 
interest as well as over reserves. 

EQUALIZING RESERVE FUNDS. 

It is evident that the Federal reserve board and the Secretary of 
the Treasury could, by shifting the deposits of the Government from 
place to place as occasion demanded, meet conditions of stringency 
and difficulty in the market, or furnish exchange funds as occasion 
appeared to require. The power would naturally be exerted before 
any resort was had to any method of interfering with the loans of the 
banks or with their reserves, and would of course be far more satis¬ 
factory as a means of equalizing resources than the exercise of the com¬ 
pulsory rediscount power. What has been done by various Secretaries 
of the Treasury in times past, and has been successfully done, toward 
the readjustment of banking accommodation, by the making and 
withdrawal of public deposits in different parts of the country, with 
comparatively meager funds, under the present Treasury system, 
gives a faint suggestion of what might be accomplished in the way 
just indicated. We have stated that in our judgment the use of the 
Treasury funds for deposit purposes in the manner referred to has 
never been desirable and has frequently resulted in leading, through 
long-continued employment, to panic or to artificial and injurious con¬ 
ditions of various kinds. What has just been said does not in the least 
weaken the force of the general observation thus restated. The 
harm resulting from past efforts of this kind has arisen primarily 
from the fact that they were necessarily carried out without intimate 
knowledge of or close association with the banking mechanism of the 
country. 

The evil which came from these efforts was due to the lack of 
adaptation to existing conditions. Under the proposed plan the 
funds of the Government will never be removed from the uses of 
the commercial community, but they will continue in the general 
regions of the country where they originated, while those who are 
to be charged with the duty of overseeing the management of Gov¬ 
ernment funds will have at their disposal the information that is 
needed to enable them to readjust deposits or to grant temporary 
relief through the shifting of Government resources should conditions 
suddenly require action of that kind. The situation will not only be 
such as will put an end to the vicious and wholly artificial state of 
things existing under the present type of Treasury organization, but 
will substitute for it a helpful system whereby definite governmental 
authority, closely informed concerning banking conditions and 
constantly in touch with the development of credit in all parts of tine 


30 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

country will be in control of an enormous mass of fluid resources 
which it can transfer by normal methods through the ordinary chan¬ 
nels of trade from one part of the country to another, as conditions 
warrant; or, better still, can direct the flow of this mass of resources 
now here and now there, as circumstances call for it. The process 
will be conducted with knowledge of the highest order and will be 
free of the difficulties which have heretofore beset the making of 
Treasury deposits. It will be similar in operation to the function that 
is performed by the central banking institutions of foreign countries 
and will be carried out by exactly similar methods save that, because 
the authorities in charge of it are not hampered by commercial 
motives and are not interested more in one part of the country than 
in another, they will be able to do the work without any of the 
interfering considerations of private profit which frequently prevent 
the operations of a central banking institution from being carried on 
solely in the public interest. In the best sense of the word, the 
Government will be completely “out of the banking business” and 
in the best and proper sense of the word it will be in that business, 
neither under the necessity of interfering with normal trade opera¬ 
tions nor of artificially interposing to bolster up weak banks in any 
part of the country. 

BANKING FACILITIES FOR FOREIGN TRADE. 

It has long been a ground of complaint that the national banking 
system provided no adequate means for the establishment of American 
banks in foreign countries. This criticism has had some warrant, and 
in view of the rapidly expanding foreign trade of the United States 
it is deemed wise to make proper provision for banking machinery 
in foreign countries which shall be closely controlled by home in¬ 
stitutions. The bill proposed by the National Monetary Commission 
sought to accomplish this end by providing for the creation of a special 
type of institutions to be organized by national banks as stockholders 
and to engage in operations abroad. The committee is of the opinion 
that no such elaborate mechanism is necessary, but that every good 
purpose of the monetary commission plan can be attained by the 
adoption of the plan it has proposed, which consists essentially of 
provision for the establishment of foreign branches by existing 
national banks when such banks have an adequate capital for the 
kind of work in which they propose to engage and are found by the 
Federal reserve board to be in proper condition for undertaking such 
an enterprise. The proposed plan is simple and, it is believed, suf¬ 
ficiently effective for the purpose. Under it national banking institu¬ 
tions will be in position to create branch offices at such foreign points 
as they may deem best, assigning to them a due share of capital and 
conducting their affairs separate from those of the home office in 
order that there may be no difficulty in ascertaining at any moment 
the distribution of the business of" the institution. It is believed 
that with the extension of national-bank powers which is provided 
for in the present act, such branches of national banks would be 
amply able to meet the requirements of their clientele wherever it 
might be necessary for them to operate. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


31 


EXAMINATIONS OF NATIONAL BANKS. 

For some years the national banking act has been found to be 
seriously defective in its provisions for examinations. In attempting 
the organization of a more closely woven system of banking the 
committee therefore feels impelled to urge the necessity of stiffening 
existing examination requirements, while it also feels the imperative 
character of the demand for careful examinations of Federal reserve 
banks. In order to fulfill all the requirements of the case it therefore 
has included in the proposed measure a considerable extension of the 
examination function, dividing this between the Comptroller of the 
Currency, the proposed Federal reserve board, and the Federal 
reserve banks themselves. The committee is of the opinion that the 
authority to institute bank examination should be lodged with every 
part of the banking organization competent and trustworthy enough 
to exercise it, not because, as some have asserted, it is desired to have 
bank examinations constantly in progress, and not because of any 
belief that such examinations would be in fact much more frequent 
than they now are, but because it is believed that the exercise of the 
power to examine whenever necessary is essentially a fundamental 
and desirable power, and one whose exercise, if judiciously carried 
out, will result m the early detecting of dangerous conditions and their 
correction before they have reached a desperate stage. It is believed, 
moreover, that the provisions with reference to bank examinations, 
if properly carried out, will largely if not wholly obviate any necessity 
for the clearing-house examinations, which are carried on at the 
present time in behalf of associations of banks and of which there has 
been more or less complaint on the ground, however unjustified, that 
such examinations were unfairly carried on or were in some way used 
for the benefit of individual banks or bankers. That such charges 
have frequently been unjustified is undoubtedly true, but it is believed 
that the new system of placing all such examinations under authorized 
control and supervision will eliminate many possibilities of criticism 
or attack that lurk in the present system and may at times give rise 
to prejudice and specious assertions of favoritism. 

DETAILED REVIEW OF BILL. 

Having thus examined in outline the principal considerations which 
have led to the formulation of the proposed bill and the chief ideas 
that have dictated the form that has actually been given to it, it is 
now desirable to examine the terms of the proposed measure in detail. 

SECTION 1. 

Section 1 creates a short title which may be used for convenience, 
sake in the future in referring to the act. It needs no further dis¬ 
cussion. 

SECTION 2. 

Section 2 provides for the districting of the country and for the 
organization of a reserve bank in each such district. These two 
topics may be discussed separately, it being prefaced that the pur¬ 
pose of the proposed bill is to substitute for the national currency 


32 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

associations of the Aldrich-Vreeland law a series of reserve banks to 
be organized in independent districts and to do in a better and more 
continuous way the services which had been expected of the currency 
associations themselves. 

It has been explained at an earlier point that the purpose of any 
thorough banking legislation must necessarily be the creation of a 
means for rediscounting existing paper and for furnishing either a 
bank credit or an elastic and reliable bank-note issue as the medium 
by which such discounts may be afforded. Without going more into 
the theory of this proposition, already thoroughly well covered, it 
may be stated that the medium through which the present bill pro¬ 
poses to attain these ends is the organization of a reserve bank to be 
entitled a “Federal reserve bank” in each one of the Federal reserve 
districts to be established as provided in section 2. In briefest terms, 
then the reserve bank in each district will do for existing banks what 
an ordinary bank does for its customers; that is to say, it will hold 
their surplus funds, furnish them loans, offset their payments and 
receipts, and supply them with the means .of making remittances. 
In broad theory there will be no difference between the services per¬ 
formed by the reserve banks or bank and those performed by the 
existing banks for individual customers. Unless it be true that the 
reserve banks are granted some special privilege or relationship to 
the Government there will be no reason why they should not be 
organized upon the same basis and for same general purposes as 
existing banks. Indeed, with one or two minor modifications of 
existing law they could be so organized under the present national 
bank act. It is to be noted that some national banks now organized 
and doing business in the larger cities perform in a measure very 
much the same functions for smaller banks which do business with 
them that it is now proposed to have the reserve banks to be organ¬ 
ized under this act do for the banks that are to be their constituent 
stockholders. The existing banks which perform this function do it 
for profit, and when opportunity offers make exorbitant returns for 
themselves on the transactions they enter into. The proposed 
reserve banks are to be cooperative institutions, rendering their 
service for the good of all the banks that are stockholders in them, 
as well as for that of the public, while the Government is to get the 
excess profits of the institutions. The detailed functions of the 
reserve banks can be best brought out in connection with subsequent 
sections, where they are dealt with more elaborately. 

It is evident that before the different banks can be organized and 
placed it must be decided where they are to be placed and how large 
are to be the districts in which they shall operate. For reasons which 
are already partly apparent and will be made more so as the discus¬ 
sion goes on, one such bank in a district is all that is needed or could 
profitably or properly be organized there. This necessitates care in 
choosing the locations and fixing the size of the districts. Two 
fundamental considerations are sought in performing this work. 

1. To provide each section of the country that constitutes a geo¬ 
graphical and business unit with a reserve bank to serve its local 
banks and hold their reserves, making the districts sufficiently 
numerous to enable each such section to feel that its wants are met by 
its own local reserve institution under its own control. At the same 
time it is recognized that the districts should not be made so small 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 33 

as to cut the capital of the reserve institutions to a figure that would 
make them weak. 

2. To see to it that reserve banks are given a capitalization that 
will enable them to do what they are designed to do and are so 
situated as to avoid any shock to business enterprise resulting from 
the shifting of bank reserves from existing banks to the new reserve 
banks in the way outlined in the present bill. 

It is believed that the fixing of the exact number of banks and the 
delimination of the districts are points that can only be exactly met 
after careful investigation by a properly qualified body appointed 
for that purpose. It has, however, been thought wise to fix the 
minimum number of such banks to be established in order that in 
passing the law the community may be assured of adequate provision 
for its needs. It is proper to say frankly that much difference of 
opinion as to the number of such banks has been expressed, some 
placing the desired number as high as 50, others as low as 3. Those 
who advocate the larger number think that there should be one such 
bank in practically every reserve city, on the ground that the reserve 
cities of the present day owe their existence to a definite need which 
has resulted in their establishment, and that this need ought to be 
recognized under such legislation as may be passed. Those who 
advocate the smaller number think that the banks should be created 
in central reserve cities only. They say that these central reserve 
cities are now the ultimate holders of reserves and that if they alone 
had the reserve banks proposed to be organized under this act t-liere 
would be very little friction or difficulty in passing from the existing 
regime to the proposed plan. 

The Committee on Banking and Currency finds itself unable to 
side with either of these groups of thinkers. It believes that the 
number of reserve banks to be created ought to be large enough to 
meet the reasonable needs of the country and should not be so small 
as to play into the hands of those who want to establish a very high 
degree of centralization. It also thinks that the reserve banks should 
be few enough in number to make them really independent institu¬ 
tions, likely to look to one another for aid only under emergency 
conditions, and hence not in danger of being controlled by other 
reserve banks. It has therefore fixed the minimum number of 
reserve banks at 12. This number has however not been arrived at 
from theoretical considerations solely, but also as a result of the fol¬ 
lowing data: 

1. The committee has asked a considerable number of bankers 
then* views as to the proper number of such institutions. Many of 
these bankers were questioned during the hearings of last winter. 
Among them were Messrs. A. B. Hepburn, who thought that if such 
a plan were adopted the number should be one in each clearing¬ 
house district (hearings, p. 10); Sol. Wexler, who thought that the 
number should be about 15 (hearings, p. 623); Victor Morawetz, who 
fixed the number at 1 in each clearing-house district (hearings, 
p. 48); Sir Edmund Walker, who thought the number might run as 
high as 20 (hearings, p. 666); and others. Mr. J. V. Farwell, a well- 
known merchant of Chicago, suggested 5 to 7 as the number (hearings, 
p. 452). 


34 


CHANGES IN THE BANKING AND CURKENCY SYSTEM. 


2. Experience under the Aldrich-Vreeland law has resulted in the 
organization of 18 currency associations. 

3. The Aldrich bill, so called, or National Monetary Commission 
bill, provided for a central reserve association with 15 branches or 
16 banking institutions, open to the banking public, in all. 

4. Examination of the present bank capital of the country shows 
that the number of banks on the basis of capital contribution could not 
well be in excess of 12 or 15 if the capitalization of the reserve banks 
themselves was to be sufficiently strong to make them effective. 
Assuming that the total capital of the national banks to-day is some¬ 
what over $1,000,000,000, and assuming further that State banks 
possessing a capitalization of one-half that amount were admitted 
to the proposed institutions, it might be estimated that these Federal 
reserve banks would be owned by banks with an aggregate capitaliza¬ 
tion of $1,500,000,000. It will be shown later in the present dis¬ 
cussion that the capitalization contribution to be exacted of each 
bank is 10 per cent of its present capital. That would make a total 
capitalization for the proposed reserve institutions of $150,000,000. 
Assuming that this amount was contributed and that there were 12 
such institutions, their average capitalization would be $12,500,000, 
which is believed to be ample to meet the needs of the communities 
represented. If it should be roughly assumed that one-third of the 
proposed banks would be near the lower limit of $5,000,000 capitaliza¬ 
tion, this might mean five reserve banks with a gross capitalization of 
$25,000,000; five reserve banks with an average capitalization of, 
say, $7,500,000 andagrossof about $37,500,000, so that there would be 
left five with a gross capitalization of $87,500,000, or an average of 
$17,500,000. It is probable that as New York City already possesses 
two banks of $25,000,000 capital each, while her banking resources 
are very large otherwise, the bank of the New York district might be 
given a capitalization of $30,000,000 or $35,000,000, in which case the 
other four banks belonging to the group of large institutions might 
have an average capitalization of $13,000,000 apiece. These figures 
are all purely tentative and are merely intended to represent the way 
in which the districting might operate. Further attention can be 
given to the subject of districting and its effect upon the banks in 
connection with the study of the reserve section of the bill, which 
will be taken up somewhat later in this discussion. It is undoubtedly 
true that the proposal to create as many as 12 reserve banks will 
receive very sharp criticism from banking interests which are desirous 
that there shall be as high a degree of centralization as possible in the 
new system, while it is also thought probable that the proposed num¬ 
ber will be sharply attacked by others who think that the 12 is by no 
means enough to give all portions of the country a chance to be fairly 
represented and adequately heard in connection with the rediscount¬ 
ing of paper. The figure fixed has, however, been the result of careful 
study and the committee feels entire confidence in its approximate 
correctness. It recognizes that in the future as the country grows 
there will be need of an increasing number of reserve banks, and 
therefore the power is given to create more such banks in the future 
as occasion requires. 

Inasmuch as no machinery is in existence for the creation of such 
banks, and inasmuch as the process of districting the country can not 
be described in any hard and fast manner, it has been deemed best to 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 35 


leave this analysis of business conditions for which there are at pres¬ 
ent no adequate statistics within reach, to a committee including the 
Secretary of the Treasury, the Attorney General, and the Comptroller 
of the Currency. In order that they may do their work correctly 
and successfully it will be necessary for them to ascertain with care 
the business connections of each of the principal cities of the country 
in order that the districts in which such cities are located may be 
properly shaped in a way that will not alter the present course of 
exchange and interbank remittances. The task thus prescribed may 
be one of some considerable length, and therefore it has been deemed 
best to leave the establishment of the details and the fixing of dates 
for organization to the judgment of the committee in question, sub¬ 
ject only to the provision that in general it shall be completed within 
a reasonable time. Inasmuch as the work of making the distribution 
and apportionment of banks by districts will involve some expense, 
it is proposed to assign a moderate sum to cover the cost of travel, 
employment of expert assistance, etc. 

SECTION 3. 

Section 3 relates to stock issues, and divides the share capital into 
shares of $100. This unit is adopted because it corresponds to the 
unit of share capital in the national banking system, and is there¬ 
fore an easy basis for computation of the share capital which a given 
bank will be required under the act to take out. The fact that it has 
been determined to have the share capital of the Federal reserve banks 
bear a fixed relationship to and be subscribed by the existing banks 
of the country make it necessary to provide some means of recogniz¬ 
ing the growth of the system or its shrinkage, as the case may be. 
The second clause of section 3, therefore, calls for the increase of the 
capital stock of the Federal reserve bank according as the amount of 
capital in the system increases and is decreased by a converse process. 
This means that no Federal reserve bank would ever have a fixed 
capital, since that capital might easily change almost from day to 
day. The fact remains that the capital would be a fixed percentage 
of that held by the member banks, while in view of the later provi¬ 
sions of the act it is believed that the amount of this capital could be 
easily ascertained at any moment and the payments to withdrawing 
banks be made without any serious difficulty. 

A second feature of section 3 is the provision that each Federal 
reserve bank may establish branch offices subject to the regulations 
of the Federal reserve board not to exceed one for each $500,000 
capital of the stock of each Federal reserve bank. After due study 
it has been required that such branches should be established only in 
the district in which the Federal reserve bank is located. Branches 
of different Federal reserve banks will, therefore, not compete with 
one another, but will be simply offices established for the convenience 
of the member banks, facilitating their relations with the Federal 
reserve bank in which they are stockholders. The question may fairly 
be raised whether a Federal reserve bank should be allowed to estab¬ 
lish one office in each of the other Federal reserve districts should it 
so desire, but after due consideration it has not been deemed desirable 
to permit such an extension of the power to create branches. 


36 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


SECTION 4. 

Section 4 provides for the incorporation and organization of the 
Federal reserve banks under the conditions already outlined in the 
preceding section. Fundamentally the purpose of the section is to 
authorize the incorporation of such a reserve bank in each district 
with powers precisely analogous to those of national banks except in 
so far as altered by the act itself. The organization, officers, and the 
like of the reserve banks will under the terms of this section be the 
same as those of the national institutions. There is no reason why 
any important distinction as to type of organization should be drawn 
or exist between the typical reserve bank and the typical national 
bank. This is worthy of special note because of the claim that 
Federal reserve agents, whose functions will presently be described, 
would practically be the active managers of the reserve banks. They 
would in fact be chairmen of the boards of directors, but as in the case 
of national banks such a chairmanship might be more or less active, 
according as the bank itself chose to determine. 

The first clause of section 4 provides that a “sufficient number” of 
banks having made and filed with the comptroller a certificate, etc., 
shall thereupon be organized. As was provided in section 2, the 
minimum capital of a reserve bank is to be $5,000,000, so that the 
sufficient number referred to would mean in practice banks having a 
joint capitalization of at least $50,000,000. The sections of the 
national banking act referred to as defining the powers of the banks 
in question are those which state generally the limitations upon the 
functions of national banks and the rights and authority vested in 
them. The final provision of the first paragraph of the section giving 
to the Federal reserve bank a charter life of 20 years is the same as 
the corresponding provision of the national bank act. The power of 
Congress to dissolve the bank at an earlier date if desired is likewise 
identical with the power reserved to Congress in the case of national 
banks. 

In dealing with the organization of the reserve banks the bill pro¬ 
posed by the committee has sought in section 4 to furnish a demo¬ 
cratic representation of the several institutions which are members 
and stockholders of a reserve bank. To this end, the directorate is 
divided into three classes, each consisting of three members, while the 
stockholder banks are similarly divided into three groups or classes. 
The bill provides that the election of one member of class A and one 
member of class B shall be intrusted to each one of the groups into 
which the stockholding banks are subdivided. As it is required that 
each of the banking groups thus created shall contain approximately 
one-third of the number of banks in the district, it is clear that the 
banks comprising one-third of such capitalization would have a rep¬ 
resentative of their own in class A and also in class B. It might well 
be that the one-third in any given district would include a very 
small number of banks and that the director in question would thus 
be the representative of but few institutions. This, however, is 
deemed far better than to permit of the general choice of directors by 
all banks voting indiscriminately, it being the belief of the committee 
that by the method proposed each group of banks will preserve its 
autonomy and secure due hearing on the board of directors. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 37 


SECTION 5. 

Section 5 deals entirely with the method of increasing and decreas¬ 
ing the capital stock of Federal reserve banks and the effect thereon 
of corresponding changes in the stock of member banks. The gen¬ 
eral purpose is to require member banks to pay additional pro rata 
subscriptions as they increase their capital stock and to permit 
them to withdraw capital subscriptions in the same manner as they 
reduce their capital; or, in case they go out of business entirely 
through failure or liquidation to permit them to withdraw the cash 
paid in, assuming, of course, that there has been no loss sufficient to 
impair the capital of the reserve bank. Should such a loss occur 
the reserve bank would presumably have called sufficient of the un¬ 
paid subscriptions to restore its capital to the original amount, in 
which case the withdrawal of a sum equal to the original cash paid 
subscription would simply give the bank what it put in in the first 
place, the loss meanwhile having been borne by its contribution 
made on call. The prohibition upon the transfer Qr hypothecation 
of shares in a Federal reserve bank is, of course, necessary in order to 
prevent the reserve bank from ceasing to be a democratic organiza¬ 
tion composed of members contributing in a like pro rata propor¬ 
tion of their actual available cash resources. Any other plan might 
result in the concentration of share ownership in a few hands. The 
intent of the bill is to have all banks vote alike at elections and as a 
preliminary requirement to enforce the retention of equal percentage 
of capital by each in the business of Federal reserve banks. 

section 6. 

Section 6 is complementary to section 5 and merely provides for 
the treatment of the stock of Federal reserve banks belonging to 
member banks which become insolvent. The fundamental idea in 
it is that of intrusting the Federal reserve bank with the function in 
the case of a failure of deducting from the original amount of the 
failed bank’s subscriptions any debts or claims due from said insol¬ 
vent bank to the reserve bank and paying the rest to the receiver of 
the failed bank. This, in effect, gives the reserve bank a prior lien 
upon the assets of a failed member bank up to the amount of its 
cash-paid subscription which of course is a carrying out of the prin¬ 
ciple involved in requiring the member banks to subscribe 20 per 
cent, although they pay up but 10 per cent of their cash capital as a 
contribution to the stock of the Federal reserve bank of which they 
are members. 

section 7. 

In section 7 it is provided that the division of earnings of Federal 
reserve banks shall be such as to give to the Government a due share 
of the proceeds of the banking operation after what is considered a 
fair remuneration for Federal reserve banks themselves has been 
provided. It is also sought to devote the share of earnings going to 
the Government to the reduction of the public debt. In general, the 
process of dividing the earnings is divisible into three stages under 
this section: 

(a) The first step in the process of dividing the proceeds of the 
banking operation is that of giving to the subscribing banks which 


38 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


own the stock of the Federal reserve banks a due return for the use 
of their funds. This, after due consideration, has been fixed at 5 per 
cent—a rate of dividend which, however, is to be cumulative. This 
should not be confused, as has been done by some critics of the pro¬ 
posed bill, with a rate of 5 per cent from the capital of the banks. 
The banks, of course, will not set aside a part of their capital for this 
subscription but will devote a part of their current funds to it. The 
real question then is whether the rate of 5 per cent represents about 
the normal rate of return from current bank investments. Consider¬ 
ing the high character of the security offered we are of the opinion 
that it does do so. 

(b ) The second step in disposing of the earnings is that of the 
accumulation of the surplus. While it is not supposed that the 
Federal reserve banks will incur severe losses, on account of their 
conservative nature and the auspices under which they are to be 
carried on, it is believed that the accumulation of a surplus to fur¬ 
nish an increased source of banking capital for the reserve banks, 
and so far as practicable to obviate any necessity of calling for any 
of the unpaid balances of the original capital subscriptions is highly 
desirable. One half of all net earnings after attending to the claims 
of the 5 per cent cumulative dividend is therefore to be devoted to 
the surplus until the said surplus amounts to 20 per cent of the 
capital of the bank. The remaining one-half is to be divided in the 
proportion of three-fifths to the Government and two-fifths to the 
bank's stockholders in the ratio of their average balances with the 
Federal reserve bank for the preceding year. It will be observed 
that this introduces a new principle of distribution of earnings not 
based upon relative ownership of capital stock. More will be said of 
this point very shortly. 

(c) The third and final step in disposing of the earnings relates to 
the distribution after surplus has been fully provided for. Section 7 
would give three-fifths of all earnings after the surplus is taken care 
of to the Government and two-fifths to the member banks in propor¬ 
tion to their annual average balances as before. 

It is worth while to consider with some care what this plan of dis¬ 
tribution would signify. Assume for the sake of argument that the 
rate of earning of the Federal reserve banks is about identical with 
that reported by the comptroller for the national banks of the coun¬ 
try, or, roughly, 9 per cent. Taking 9 per cent as the figure, this would 
mean that with a total capital of $100,000,000 the earnings for the 
first year would be $9,000,000. Of this sum, $5,000,000 would be 
required for the dividend requirements. This would leave $4,000,000, 
of which $2,000,000 would be carried to surplus and the remaining 
$2,000,000 would be divided as aforesaid in the proportion of 
$1,200,000 for the Government and $800,000 for the stockholding 
banks. It is, of course, impossible to state exactly how the division 
between the stockholding banks would finally turn out, since it can not 
be definitely stated what balances they would carry with the reserve 
banks. 

THE GOVERNMENT’S SHARE. 

It has frequently been asked why the Government should be 
allowed to share in the earnings of Federal reserve banks at all. There 
are two reasons of conspicuous and obvious character why it should 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 39 


do so: (1) It vests the Federal reserve banks with the sole and ex¬ 
clusive function of note lending, from which all other banks are de¬ 
barred; (2) it places the public funds with the Federal reserve banks 
to an amount certainly vastly larger than that of any other depositor 
and equal to the combined deposits of large groups of banks. The 
distribution of earnings upon the basis of deposit balances would 
give to the Government a large share of the profits in any case and 
when the present national-bank notes shall have been replaced by 
Federal reserve notes it is obvious that the function of note issue will 
result in a large volume of earnings which the Federal reserve banks 
could not enjoy were they to share this power with other banking 
institutions. To a substantial share in this earning, leaving for the 
reserve banks only a fair compensation for their services in taking out 
the notes, the public is evidently entitled. 

The provision that the earnings of Federal reserve banks in so far 
as paid to the Government shall be regularly devoted to the reduc¬ 
tion of the bonded indebtedness of the United States is manifestly 
a proper use of the income in view of the fact that the Government 
has incurred an additional interest charge upon its outstanding bonds 
for the purpose of persuading the banks to surrender their twos from 
time to time or at the end of 20 years for the purpose of converting 
the twos. By gradually applying the earnings received by the Gov¬ 
ernment to the reduction of the outstanding bonds, selecting those 
that are available for circulation, it will be possible to maintain a 
moderate market demand for the bonds and at the same time to 
effect a gradual reduction of the outstanding indebtedness as well as, 
of course, a corresponding reduction of interest charges thereon. 

Attention should also be given to the provision exempting Federal 
reserve banks and the stock held therein by member banks from 
all classes of taxation, save such taxation as may be imposed upon 
the real estate held by these banks. In view of the increasing burden 
of taxation and of the Federal income-tax law, which now furnishes 
an additional draft upon net earnings, this exemption is likely to prove 
of material importance, since it amounts to an exemption of a cor¬ 
responding proportion of the funds of member banks from the pay¬ 
ment of taxes to which they would otherwise be subjected. 

SECTION 8. 

The essential features of section 8 are: 

1. The grant of a year’s time within which existing national banks 
may make up their riiinds whether or not to take out stock in Federal 
reserve banks under the provisions of the proposed bill; and 

2. The provision that in the event of an adverse decision on this sub¬ 
ject such national banks as may reach a decision of that character 
shall be dissolved tHe remedies now provided by law against such a 
dissolved bank shall not be impaired. 

This in effect means that every national bank now in existence 
must within a year either (a) take out stock in a Federal reserve 
bank, ( b ) become a State bank under State laws, or (c) leave the busi¬ 
ness entirely. It is evident that any measure of legislation which 
imposes substantial responsibilities and burdens upon banks will be 
opposed bv some of them, and that unless they are required to assume 
their duties to the community, they will if they are permitted to make 


40 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


a voluntary choice between their present condition and that proposed 
for them, elect to continue as at present. No matter how advan¬ 
tageous a plan proposed by Congress might be, many banks would 
refuse to go into it out of sheer inertia. This w^as the condition of 
affairs found by experience to exist at the tune when the national 
banking act was first adopted, and it will be repeated to-day if the 
whole matter of assuming the new responsibilities prescribed by law 
is left optional with the banks. In view of the fact that the banks 
have their own remedy in their own hands, in that they may recharter 
under State laws if they desire, the measure recommended in section 8 
is deemed entirely proper, not to say indispensable. The committee 
does not believe that it is the province of Congress to bribe or induce 
the banks to enter the new system, but rather to lay down equitable 
conditions and then to require their acceptance. 

QUESTION OF “ COMPULSION.” 

Much has been said by opponents of the proposed bill with reference 
to the question of what they call “.compulsion.” By this is meant 
the requirement of the bill that national banks shall subscribe to the 
stock of the Federal reserve banks of the districts in which they are 
situated, or if they do not choose to do so shall leave the national 
banking system by surrendering their charters. A few persons have 
been disposed to contend that there was some illegality or “uncon¬ 
stitutionality” in this section of the measure—a claim which is readily 
dispelled by referring to existing legislation bearing upon the power 
of Congress regarding the amendment or repeal of corporate char¬ 
ters. Those who complain of this provision, however, need not be 
dealt with simply upon technical legal grounds, as the subject has 
a very much broader bearing, and we believe that there is no one 
who would wish to visit any hardship or injustice to the banks sim¬ 
ply because Congress was within its legal rights in so doing. The 
general considerations which make it entirely warrantable for Con¬ 
gress to impose certain burdens upon banking institutions as condi¬ 
tions precedent to the grant of national charters to such institu¬ 
tions are quite evident. They appear in all of the various more or 
less stringent and onerous conditions laid down in the national-bank 
act for the guidance of the conduct of banking associations. They 
are also seen in the restrictions imposed by practically all foreign Gov¬ 
ernments upon the conduct of the banking institutions under their 
jurisdiction. 

The Government, in granting to such banks the power and privilege 
to operate under the protection and with the prestige of charters ema¬ 
nating from itself, naturally is authorized to make these privileges 
contingent upon the acceptance of such conditions as it may deem best. 
Nor is the argument solely to be rested upon these considerations. 
The proposed bill will ultimately place the banks of the country upon 
a far more liberal basis than that accorded to them by existing law. 
This may be demonstrated, among other methods, in the following 
way: By the terms of the national banking act banks must, in order 
to become national banks, purchase and deposit with the Treasurer of 
the United States Government bonds as security for circulation. This 
requirement is nominally 25 per cent of capitalization for banks up 
to $150,000 capital and $50,000 for all above that level. In reality 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


41 


the requirement is much stronger than this, inasmuch as no notes 
can be taken out without a deposit of Government bonds behind 
them. Inasmuch as the supplying of notes is absolutely necessary 
if the banks are to meet the needs of their customers even in a mod¬ 
erate degree, the proper measure of the burden imposed on them by 
this requirement is the volume of the bonds that they have purchased. 
As is shown elsewhere in the present report, this volume of bonds is 
now something like $750,000,000, or very nearly three-quarters of the 
capital stock of the banks. The proposed bill arranges for releasing 
the banks from this required investment and substitutes in lieu of it a 
required investment equal to 10 per cent of their capital (paid up), or 
not to exceed $105,000,000. This is one-seventh of the amount now 
invested in bonds. Inasmuch as the proposed bill allows the conver¬ 
sion of existing 2 per cent bonds into threes at the rate of 5 per cent 
per annum, while it gives the banks a year within which to enter the 
proposed reserve banks as stockholders, it is evident that within one 
year from the latest date set for the subscriptions to the capital stock 
a bank owning bonds equal to capital would have been able to obtain 
through conversion and sale of its securities an amount equal to the 
required investment in capital. 

The answer may be made to this statement that the earnings upon 
the investment in bank stock are unreasonably and unnecessarily 
small. How much they will be is of course a matter of opinion, since 
no one can predict the actual profits of the Federal reserve banks. 
It is, however, worthy of note that even if the earnings were only 5 per 
cent they wmuld be in excess of the estimated earnings derived from 
national bank-note issues, which have been notoriously unprofitable 
for a good while. The banks receive the 2 per cent on their bond 
investment and the current rate of interest on their notes (provided 
they can keep them in circulation), but they are obliged to bear the 
expenses of engraving and printing, redemption, etc., so that it has 
long been axiomatic that the profits on bank-note circulation were 
very small—so small that many banks have taken out few notes, some 
even holding their required minimum of bonds without taking out 
any currency. From this showing it is evident that the idea of 
“ compulsion,” instead of being a novelty is a very old one, as well as 
one that is widely accepted among civilized countries to-day, while 
the seveiity and degree of the compulsion as to the use of the bank’s 
current funds entailed by the proposed bill is very much less than that 
involved in the provisions of the present national bank act. There 
is in fact no reasonable basis for the complaint with regard to com¬ 
pulsion. National banks after the passage of the proposed bill will 
be freer, more able to dispose of their funds as they choose, and far 
less subject to serious interference with their legitimate use of resources 
than they are to-day. 


section 9. 

Section 9 is a general permission to any State bank to become a 
national bank and thereby to become eligible upon the same terms 
as national banks for membership in a Federal reserve bank as a 
stockholder. The provisions follow substantially the lines now laid 
down in the national banking act with reference to the conversion 
of State banks into national institutions and need no considerable 


42 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


comment, being repeated here for the sake of making plain the con¬ 
ditions under which such conversion may occur subsequent to the 
passage of this act, that there may be no reasonable doubt in regard 
to the matter, and that it may be certain under precisely what terms 
and conditions State banks may make the transfer required. 

section 10. 

After much examination of the subject, it has been deemed best 
by the committee to permit State banks to become members, i. e., 
stockholders in Federal reserve banks, without themselves becoming 
national banks. This concession has been determined upon partly 
from the standpoint of the banks themselves and partly from that of 
the new system. The success of the new system would be very 
largely influenced by its extent and scope. If it becomes practically 
inclusive of all the banks of the country that are in strong condition, 
its opportunity for service will be much greater than it could other¬ 
wise be. On the other hand, the committee has doubted whether, 
from the standpoint of the banks themselves, it would be acting 
fairly were it to debar them from membership in the new concerns. 

It has been plain, however, that inasmuch as State banks are 
organized under different codes of legislation it would be unfair to 
permit banks to become stockholders in the reserve banks and to 
enjoy the advantages open to national banks which are stockholders 
unless such banks were subject to practically as high a standard 
of banking requirement as the national banks with which they 
compete. It has been felt that the particulars in which greatest care 
should be exercised on this score are (a) capital and ( b ) reserves. The 
fundamental idea of section 10 is to require compliance with the 
terms of the bill and of the national banking act as a condition ante¬ 
cedent to the holding stock in a reserve bank by any State bank. 
This does not altogether place the State banks upon the same basis 
as the national, inasmuch as they are not thus subjected to the same 
regulations with respect to investments and general business. It is 
believed, however, that the principal requirements will thus be met 
and that the provisions of the section are about as far as the measure 
can reasonably go with certainty of being held legal and at the same 
time of proving feasible and available in practice. As a necessary 
power in connection with this question of membership section 10 
confers upon the Federal reserve board the power to establish by¬ 
laws for the general government of its conduct in acting upon applica¬ 
tions made by State institutions, while it intrusts to the board the 
power to approve applications when proper or to suspend banking 
associations from membership when the provisions of the act are 
violated, and to secure the cancellation and retirement of their stock, 
returning the value thereof to the banks so suspended. 

section 11. 

In this section provision has been made for the creation of a general 
board of control acting on behalf of the National Government for 
the purpose of overseeing the reserve banks and of adjusting the 
banking transactions of one portion of the country, as well as the 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 43 


Government deposits therein, to those of other portions. The num¬ 
ber of members of this board has been fixed at seven, after careful 
consideration of other possible memberships, and it has been deter¬ 
mined that the board as thus made up should consist of two distinct 
elements, the one including three regular officers of the National 
Government, the other four specially appointed officers whose duty 
it should be to devote their whole time to the management of the 
affairs of the reserve banks and the performance of the duties assigned 
them under the present bill. The three officers chosen from the 
existing staff of the Federal Government are to be the Secretary of 
the Treasury, the Secretary of Agriculture, and the Comptroller of 
the Currency. It is evident that the Treasury Department not only 
is, but will continue to be, a fundamentally important factor in the 
financial organization of the country, while the Comptroller of the 
Currency, in charge as he is of the national banking system, will be 
a necessary adjunct in the management of the reserve bank system 
proposed in this bill. The causes for the selection of the two officers 
thus named are therefore self-evident. The Secretary of Agriculture 
has been added because of the belief that conditions in the producing 
regions of the country would deserve special consideration at the 
hands of the Federal reserve board, the Secretary of Agriculture 
being the natural representative of the interests of these sections, 
while it is further thought that the presence of a member on this 
board whose direct concerns are not primarily those of technical 
business or banking will be beneficial and will give the deliberations 
of the board a broader character than they would otherwise possess. 

The four members chosen by the President for special service on 
the Federal reserve board will necessarily be intrusted with the 
heavier and routine duties pertaining to this board, the regular 
officers of the Government being naturally engaged in large degree 
. in the discharge of their ordinary functions. It is therefore important 
to provide for the proper choice of the four officers thus called for. 
The committee has thought it wise that they should be assigned a 
tolerably long tenure, and has accordingly fixed that tenure at eight 
years, providing, however, that the first appointees shall be so dis¬ 
tributed with respect to tenure of office as to bring about a rotation, 
so that all members of the board shall not change at any one time. 
In the second place, it has been deemed wise to provide that not 
more than two of these four members shall belong to the same 
political party. It can not be too emphatically stated that the com¬ 
mittee regards the Federal reserve board as a distinctly nonpartisan 
organization whose functions are to be wholly divorced from politics. 
In order, however, to guard absolutely against any suspicion of politi¬ 
cal bias or one-sidedness, it has been deemed expedient to provide in 
the law against a preponderance of members of one party. 

The provision that the President in making his selections shall so 
far as possible select them in order to represent the different geo¬ 
graphical regions of the country has been inserted in very general 
language in order that, while it might not be minutely mandatory, 
it should be the expressed wish of the Congress that no undue pre¬ 
ponderance should be allowed to any one portion of the Nation at 
the expense of other portions. The provision, however, does not 
bind the President to any slavish recognition of given geographical 
sections. 


44 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


Finally, it has been thought wise to insert a provision that at least 
one of the four persons so chosen by the President shall be an expe¬ 
rienced banker. This, of course, does not mean that other members 
of the board would be inexperienced in or ignorant of banking. On 
the contrary, the assumption is that they would not be chosen unless 
at least tolerably informed in the banking field, and that in all prob¬ 
ability they would be not only experienced in banking but men of 
broad business knowledge and culture. This, however, is a matter 
that must necessarily be left to the appointive power, which not 
only should but must, in order to give good results, be vested with 
discretionary authority sufficient to enable it to make careful choice 
from among all of the best material available for such a board. It 
might easily be that a man of high business caliber, thoroughly 
desirable as a member of the board, would not have had a technical 
banking experience, notwithstanding that he might be well equipped 
for the work. The Comptrollers of the Currency in times past have 
not always been bankers in the technical sense, and some of the most 
efficient among them have had least technical experience in banking 
at the time when they assumed office. It is therefore believed safe 
to vest this whole matter in the hands of the President with large 
authority, believing that he will be able to use the same care and 
discrimination that he employs in choosing the Supreme Court of 
the United States. For obvious reasons it is considered wise that 
every member of the Federal reserve board designated by the Presi¬ 
dent shall surrender any banking connections he may have had at 
the time of his nomination, and for equally obvious reasons it is 
deemed best that the board shall annually report to the House of 
Representatives, thereby establishing a direct relationship between 
the board and the Congress. The President is authorized to desig¬ 
nate one of the four appointees as manager of the Federal reserve 
board and one as vice manager, this being deemed wiser than to 
throw upon so small a board the duty of selecting executive officers 
from among its own membership. In designating the Secretary of 
the Treasury as ex officio chairman of the Federal reserve board the 
bill aims to preserve the general concept of official responsibility and 
duty which is fundamental to the conception of this board. In 
ordinary times the Secretary of the Treasury’s relation to the board 
would be largely formal. In times of stress or sudden danger he 
might become an active and effective working member of the board. 

The final paragraph of section 11 is intended to make the Comp¬ 
troller of the Currency in all respects answerable to the Federal 
reserve board, thereby giving this board the practical connection it 
needs with the national banks of the country which are under the 
direct supervision of the Comptroller of the Currency. This is 
believed to be desirable, inasmuch as the Comptroller of the Currency, 
although a member of the Federal reserve board by virtue of the 
earlier provisions of this section, might otherwise not be held to be 
answerable to the board in his official capacity as the chief of the 
national banking system. The paragraph referred to now makes him 
responsible to the “ Secretary of the Treasury acting as the chairman 
of the Federal reserve board,” which implies that the board would 
have power to instruct the comptroller upon all necessary matters, 
preferably through the chairman, whenever action affecting the 
national banks in those respects in which they are subject to the 


CHANGES IN THE BANKING AND CURKENCY SYSTEM. 45 

oversight of the comptroller was called for. The proviso at the end 
of the paragraph in question, however, makes it evident that there 
is nothing in this grant of authority or in this imposition of respon¬ 
sibility to reduce the functions of the comptroller as at present under¬ 
stood or to render him less amenable than he now is to the Secretary 
of the Treasury, who is his chief under existing circumstances. 

SECTION 12. 

In this section are set forth the basic functions bestowed upon the 
Federal reserve board. These are not all the powers given to the 
board, it having been necessary to distribute various other minor 
grants of authority throughout the bill in the connections to which 
such grants of authority specifically relate. The provisions of sec¬ 
tion 12, however, cover sufficiently the fundamental authorities 
bestowed upon the reserve board. These may now be taken up in 
order: 

(a) In paragraph (a) is given the authority to examine the affairs 
of each Federal reserve bank, to require statements and reports, and 
to publish a weekly showing of condition. This is substantially the 
same kind of authority which is to-day exercised by the Comptroller 
of the Currency with respect to national banks, except that it is 
more constant, close, and intimate as the different nature of the case 
requires. The powers thus bestowed are identical with those granted 
to the supervising boards in control of the central banks of Europe. 

(b) In paragraph ( b ) is given to the board the authority (1) to 
permit or (2) to require one Federal reserve bank to rediscount the 
discounted prime paper of other reserve banks. Much has been said 
of this grant of authority and it therefore deserves careful analysis. 
In the first place, it is evident that this power is not different in nature 
from that which is exerted by the head office of a central bank pos¬ 
sessing several branches. Such an office can transfer funds from one 
to another, and withdraw the service of one for the service of the 
others. It can, moreover, employ the resources of one portion of the 
country for the advantage of other portions or for the purpose of safe¬ 
guarding them at critical times if its managers deem such actions to 
be wisest. Those, therefore, who favor the idea of a central bank 
with a single head office, favor it because it grants just this power 
to dispose of the resources of the one section for the benefit of another, 
and must in consequence find themselves logically driven to a recog¬ 
nition of the view that such authority to transfer funds and to mass 
them at points where weakness has been indicated is properly to be 
exerted in the interest of the public. In the proposed bill, the exer¬ 
cise of such a power is subjected to restrictions which would mani¬ 
festly and unquestionably make its use sporadic and exceptional, 
in so far as it resulted from the exercise of a power to compel the redis¬ 
counting of paper by one Federal reserve bank for another. Section 
12, in specific terms, explains that the power is to be exerted only 
“in time of emergency” and by a unanimous vote of the reserve 
board. It, moreover, imposes a penalty charge of from 1 to 3 per 
cent upon the grant of such an accommodation. The power is clearly 
much less than that which has been advocated by friends of the 
central bank idea, inasmuch as it suggests an exceptional or occa¬ 
sional resort to an expedient which would be the staple of everyday 


46 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


business under a central banking plan, such as that proposed by the 
National Monetary Commission. The other side of the function—that 
of permitting Federal reserve banks to rediscount for one another— 
has also been objected to on the ground that such banks should be 
allowed to deal with one another freely if they choose. The com¬ 
mittee does not concede this view, but believes that the banks should 
not thus be allowed to deal with one another except under oversight, 
in view of their distinct character as reserve holders. 

( c ) Paragraph (c) grants the Federal reserve board the power to 
suspend the reserve requirements of the act for designated periods 
if in its judgment such action may be deemed wise. There is nothing 
unusual or revolutionary in this requirement, it being in practice 
somewhat akin to the power granted the Comptroller of the Currency 
in section 5191, Revised Statutes, where he is practically able to per¬ 
mit national banks to go below their reserve for 30 days. In practice 
this power is constantly exercised by him subject to his judgment. 
The power is suggested by the process of “suspending the bank act” 
in England, and is a desirable administrative function in every case 
where a fixed reserve requirement is employed. 

(< d ) The power to supervise and regulate the retirement of Federal 
reserve notes granted in this paragraph is of course a necessary 
concomitant to Government control of note issues, a matter to be 
discussed in detail in connection with the provisions for note issue. 

(e) In paragraphs ( e ), (/), (g), (h), and (i) are conveyed powers 
which are largely self-explanatory and about which there can be little 
or no question, granting the general idea of effective Government 
oversight through a Federal reserve board or some similar organ¬ 
ization. 

In view of the fact that the Federal reserve board is vested with 
functions other than those formally enumerated in section 12, it may 
be worth while to list the chief powers conferred upon the board by 
the act as follows: 

POWERS OF THE FEDERAL RESERVE BOARD. 

To readjust districts created by the organization committee and create new ones, 
acting upon a joint application made by 10 of the national banks within an existing 
district. 

To regulate the establishment of branches of Federal reserve banks within Federal 
reserve district in which bank is located. 

To designate three (class C) of the nine members of the board of directors of each 
Federal reserve bank, one of these to be chairman of the board with the title of 
“Federal reserve agent.” 

The Federal reserve agent to maintain a local office of the Federal reserve board 
on the premises of the Federal reserve bank. He shall make regular reports to 
Federal reserve board and be its official representative. 

To remove any director of class B (business men) if it should appear that he does 
not fairly represent the commercial, agricultural, or industrial interests of his district. 

To remove chairman of Federal reserve bank without notice. 

To establish by-laws governing applications from State banks and trust companies. 

“Of the four persons * * * appointed (by the President), one shall be desig¬ 
nated manager and one vice manager of the Federal reserve board.” The manager, 
subject to supervision of the Secretary of the Treasury and board, shall be the active 
managing officer of the Federal reserve board. 

To levy a semiannual assessment upon the Federal reserve banks for estimated 
expenses for succeeding six months, together with deficit carried forward. 

To examine at its discretion the accounts, books, and affairs of each Federal reserve 
bank and to require such statements and reports as it may deem necessary. 

To require, or on application to permit, a Federal reserve bank to rediscount the 
paper of any other Federal reserve bank. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 47 


To suspend, for a period not exceeding 30 days (and to renew such suspension 
for periods not to exceed 15 days), any and every reserve requirement specified in 
this act. 

To supervise and regulate the issue and retirement of Treasury notes to Federal 
reserve banks. 

To add to the number of cities classified as reserve and central reserve cities 
under existing law in which national banking associations are subject to the reserve 
requirements set forth in section 21 of this act, or to reclassify existing reserve or cen¬ 
tral reserve cities and to designate the banks therein situated as country banks, at 
its discretion. 

To require the removal of officials of Federal reserve banks for incompetency, 
dereliction of duty, fraud, or deceit. 

To require the writing off of doubtful or worthless assets upon the books and bal¬ 
ance sheets of Federal reserve banks. 

To suspend the further operations of any Federal reserve bank and appoint a 
receiver therefor. 

To perform the duties, functions, or services specified or implied in this act. 

To determine or define (subject to stipulations) the character of paper eligible for 
discount for member banks. 

To prescribe regulations for purchase and sale by Federal reserve banks of bankers’ 
bills, etc. 

To review and determine the minimum rate of discount established by Federal 
reserve banks. 

To authorize establishment of branches of Federal reserve banks in foreign countries. 

To authorize the issue of Federal reserve Treasury notes. 

To receive, through the local Federal reserve agent, applications from Federal 
reserve banks for notes, such applications to be accompanied by rediscounted notes 
for deposit as collateral security. 

To require Federal reserve bank to maintain deposit in money of 5 per cent of notes 
issued. 

To grant in whole or in part or to reject entirely the application from Federal reserve 
bank for notes. 

To establish rate of interest on notes issued. 

To prescribe regulations for substitution of collateral. 

To make and promulgate regulations governing the transfer of funds at par among 
Federal reserve banks. 

To act, if desired, as clearing house for Federal reserve banks. 

To require, in its discretion, Federal reserve banks to act as clearing houses for 
shareholding banks. 

To prescribe regulations for the recall and redemption of all national-bank notes 
outstanding after 20 years. 

To require extra examinations of national banks when deemed necessary. 

To determine and report annually to Congress fixed salaries of all bank examiners. 

To assess upon banks in proportion to assets or resources the expenses of examinations. 

To fix a date for such assessment. 

To arrange for special or periodical examinations of member banks for account of 
Federal reserve banks. 

To receive from Federal reserve banks information concerning the condition of any 
national bank in its district. 

To order examinations of national banks in reserve cities as often as necessary, not 
less than four times a year. 

To add to the list of cities in which national banks shall not be permitted to loan 
on real estate as described. 

To receive applications from national banks having $1,000,000 or more capital for 
the establishment of branches in foreign countries, to reject or accept such applica¬ 
tions, and to prescribe conditions under which such branches may be opened. 

To require examinations of foreign branches as it may deem best. 

To regulate savings departments of national banks and to prescribe their invest¬ 
ments. 

SECTION 13. 

Section 13 provides for the creation of a Federal advisory council 
which is to consist of as many members as there are Federal reserve 
districts, each such district electing through the board of directors 
of its Federal reserve bank a representative of that bank. The func¬ 
tions of this board are wholly advisory and it would amount merely 


48 


CHANGES IN THE BANKING AND CUKRENCY SYSTEM. 


to a means of expressing banking opinion, informing the reserve 
board of conditions of credit in the several districts, and serving as a 
source of information upon which the board may draw in case, of 
necessity. The desirability of such a body as a source of information 
and counsel is obvious, and it is believed that it gives to the banking 
interests of the several districts ample power to make their_ views 
known, and, so far as they deserve acceptance, to secure such accept¬ 
ance. 

section 14. 

In section 14 is set forth the fundamental business purpose of the 
bill in providing for rediscount operations. The Federal reserve 
banks are at the outset authorized to receive current deposits from 
their stockholders or from the Government or from other Federal 
reserve banks in so far as the latter may need to keep funds with them 
for exchange purposes. 

The fundamental requirement throughout all of the discount sec¬ 
tion of the proposed bill is that antecedent to the performance of a 
service by a Federal reserve bank for a member bank which applies 
therefor the member bank shall indorse or guarantee the obligations 
which it offers for rediscount. Subject to this requirement, the pro¬ 
posed bill first of all provides that notes and bills having a maturity 
of not over 90 days and drawn for agricultural, industrial, or com¬ 
mercial purposes or the proceeds of which have been used for such 
purposes shall be admitted to rediscount. The meaning of this pro¬ 
vision is briefly that any paper drawn for a legitimate business pur¬ 
pose of any kind may be rediscounted when within 90 days of ma¬ 
turity. It does not mean that the paper thus rediscounted shall 
have been originally made for 90 days, but that it shall have at the 
time of being rediscounted 90 days more to run. Thus a paper 
drawn for 120 days originally could be rediscounted when it was 
30 days old. In view of the great difficulty of defining “ commercial 
paper,” the actual definition of the same has been left to the Federal 
reserve board in order that it may adjust the definition to the prac¬ 
tices prevailing in different parts of the country in regard to the trans¬ 
action of business and the making of paper. For obvious reasons it 
is forbidden that any such paper shall be admitted to rediscount if 
made for the purpose of carrying stocks or bonds. 

It was felt that in some parts of the country the permission to 
rediscount paper having a maturity of 90 days might not fulfill all 
of the requirements imposed by the business practice of those regions, 
and therefore it is provided in the third paragraph of section 14 that, 
whenever the reserve of any Federal reserve bank is reasonably above 
its required minimum (such excess margin to be determined" by the 
Federal reserve board), the reserve bank may rediscount commercial 
paper having a maturity of not more than 120 days, provided that 
not more than one-half of it shall have a maturity exceeding 90 days. 
This is intended to fulfill the requirements of portions of the country 
with an extremely long term of credit, but it is clear that no reserve 
banks should be allowed to put its funds into a form in which they 
will be “tied up” to such an extent, unless such a bank has a reserve 
perfectly adequate to take care of any necessities that are likely to 
present themselves in the meantime. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 49 

The fourth paragraph of section 14 grants permission to reserve 
banks to rediscount acceptances of member banks which are based 
on the exportation or importation of goods, run not more than six 
months, and bear the signature of one member bank in addition to 
that of the acceptor, the total of such rediscounts not to exceed one- 
half the capital of the bank for which the rediscounts are made. In 
the sixth paragaph, national banks are authorized to accept drafts 
or bills of exchange drawn upon it to an amount not exceeding one- 
half its capital. The acceptance business, which it is thus proposed 
to authorize, is a new form of business heretofore forbidden to national 
banks, by reason of the provisions and interpretations of the national¬ 
banking act, which have forbidden them to lend their credit or to 
incur contingent liabilities thereby. The acceptance form of loan 
is, however, very common in Europe, and has been found exceedingly 
serviceable. It is the opinion of expert bankers that it could be 
applied in the United States to excellent advantage. The following 
extract from a discussion of acceptances by Lawrence Merton Jacobs 
explains the method and purpose of the acceptance business: 

“ The fundamental difference between European and American bank¬ 
ing has its origin in the dissimilarity between the evidences of indebt¬ 
edness which lie behind the item of loans and discounts. It is most 
strikingly evidenced in the fact that time bills of exchange form a 
considerable proportion of the resources of the great banks of London, 
Paris, and Berlin, whereas the assets of leading New York banks are 
largely based on stocks and bonds. 

“ Of the bills of exchange in which are employed, either through loans 
or discounts, the funds of European banks, an essential part consists 
of what are known as bankers’ bills—that is, bills drawn on bankers 
and accepted by them on behalf of customers in accordance with 
arrangements previously made. They are bills in exchange for which, 
by sale to a broker or by discounting at a bank, bankers’ customers 
or those to whom they are indebted may secure immediate credit. 
In some instances it is arranged that the customers themselves shall 
draw the bills and in others that the bills shall be drawn by third 
parties for their account. In granting the accommodation the obliga¬ 
tion that the bankers take upon themselves is that they will accept 
the bills upon presentation. This acceptance consists in the bankers 
writing across the face of the drafts the word “Accepted,” adding 
their signature and the date. It is in the nature of a certification 
that the bills will be paid at maturity—that is, a specified number of 
days or months from the date appearing in the acceptance, or three 
days later if grace is allowed, as m England. When a banker grants 
accommodation to a customer by means of an acceptance he may 
secure himself in various wavs. Ordinarily a banker accepts a cus¬ 
tomer’s draft merely upon his general responsibility, the banker’s 
risk being much the same as if he had discounted the customer’s note 
running a certain length of time. Where the customer is an importer 
the banker ordinarily accepts the drafts upon the delivery to him of 
the documents covering the shipment, which documents he then turns 
over to his customer against a trust receipt. When a credit of this 
kind is opened the usual practice is for the banker to require the sig¬ 
nature of a form containing an agreement to hold him harmless for 
accepting the bills, to place him in funds sufficient to pay off the 
bills three days prior to their maturity, and to pay him a commission 
8829°—H. Kept. 69, 63-1-4 



50 CHANGES IN THE BANKING AND CUKRENCY SYSTEM. 

on the transaction, this commission varying according to the length 
of time the bills are to run and the financial standing of the customer. 
The cost of the accommodation to the customer in this commission 
plus the prevailing rate of discount for bankers’ bills. 

“In the United States the national-bank act does not permit banks 
to accept time bills drawn on them. Although the act does not specifi¬ 
cally prohibit such acceptances, the courts have decided that national 
banks have no power to make them. This restriction has had a 
very considerable influence upon the development of banking in this 
country. For some time after the passage of the national-bank act, 
merchants and manufacturers provided themselves with funds by 
discounting their promissory notes with their local banker. Grad¬ 
ually, however, many concerns, finding that their needs were out¬ 
stripping the banking accommodation which they could secure in 
their immediate vicinity, came to place their notes in the hands of 
brokers who in turn disposed of them to such bankers as possessed 
greater surpluses than tney could satisfactorily invest at home. It 
is this method of borrowing which is now largely employed. In other 
words, the prohibition of bank acceptances has led to the creation of 
a vast amount of promissory notes instead of time bills of exchange. 
The difference between these two classes of instruments accounts to 
a great extent for the difference between European and American 
banking. In the case of time bills of exchange drawn on and ac¬ 
cepted by prime banks and bankers there is practical uniformity of 
security. In the case of our promissory notes or commercial paper 
there is no such uniformity, the strength of the paper depending on 
the standing of miscellaneous mercantile and industrial concerns. 

“ It is this uniformity of security on the one hand which makes pos¬ 
sible a public discount market; it is the lack of it in single-name paper 
which makes such a market impossible. As a result, we have great 
discount markets in London, Paris, and Berlin, and none in New York. 
In European centers the discount rate is the rate upon which the eyes 
of the financial community are fixed. In New York it is the rate 
for day-to-day loans on the stock exchange. The advantage in 
character of the one rate over the other clearly indicates an important 
advantage of European banking systems over our own. In the first 
place, the European discount rate bears a very direct relation to trade 
conditions. Its fluctuations depend primarily on the demand for and 
supply of bills which owe their origin to trade transactions, as bal¬ 
anced against the demand for and supply of money. If trade is 
active, the supply of bills becomes large, rapidly absorbing the loanable 
funds of the banks. As these surplus funds become less and less 
banks are unwilling to discout except at advanced rates. If trade 
is slack, less accommodation from bankers in the way of acceptances 
is required, bills become fewer in number, the competition for them 
in the discount market more keen, and the rate of discount declines. 
Low rates are an incentive to business and advancing rates act as a 
natural check. The New York call-loan rate, on the other hand, 
bears only an indirect relation to trade conditions. Its day-to-day 
fluctuations register mainly the speculative and investment demand 
for stocks. Low rates, instead of being an incentive to the revival 
of trade, are rather made the basis for speculative operations in 
securities. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


51 


“ The striking difference, however, between European discount rates 
and the New York call-loan rates is that the former are compara¬ 
tively stable and the latter subject to most violent oscillations. For¬ 
eign discount rates as bank reserves become depleted advance by 
fractions of 1 per cent. In New York the money rate advances on 
occasion 10 per cent at a time, mounting by leaps and bounds from 
20 per cent to 100 per cent in times of stress.” 

AMOUNT OF REDISCOUNTS. 

There has been extensive conjecture as to the probable amount of 
business which could be done by the Federal reserve banks under 
the foregoing provisions and regarding the amount of paper likely to 
be presented by the banks for rediscount. Such conjecture is more 
or less profitless, for two reasons: 

1. The rediscount business done in the United States heretofore 
has been small, partly because of the limitations of the national-bank 
act and partly because of the prejudice against borrowing by banks, 
which has more or less artificially sprung up. 

2. The purpose of the new act is to develop a commercial paper 
market, and if successful in this endeavor the legislation will entirely 
transform the conditions under which paper is bought and sold, loans 
contracted between banks, and funds transferred from one part of 
the country to another. 

While it is thus true that the facts as to existing conditions do not 
throw much light upon what is to be expected and that conjectures 
based upon them are futile, it is worth while to call attention to the 
following table, taken from the last annual report of the Comptroller 
of the Currency, which gives a compact survey of the classes of paper 
which might theoretically be available for rediscount under the 
provisions of the act as already explained: 


1 

Date. 

2 

Num¬ 
ber of 
banks. 

3 

On de¬ 
mand, pa¬ 
per with 
one or 
more in¬ 
dividual 
or firm 
names. 

4 

On de¬ 
mand, se¬ 
cured by 
stocks, 
bonds, and 
other per¬ 
sonal secu¬ 
rities. 

5 

On time, 
paper with 
two or 
more indi¬ 
vidual or 
firm names. 

6 

On time, 
single¬ 
name paper 
(one person 
or firm) 
without 
other secu¬ 
rity. 

7 

On time, 
secured by 
stocks, 
bonds, and 
other per¬ 
sonal secu¬ 
rities, or on 
mortgages 
or other 
real estate 
security. 

8 

Total. 



Millions. 

Millions. 

Millions. 

Millions. 

Millions. 

Millions. 

Sept. 15, 1902. 

4,601 

$237.3 

$706.9 

$1,176.4 

$517.1 

$642.4 

$3,280.1 

Sept. 9, 1903. 

5,042 

283.1 

717.3 

1,267.5 

558.1 

655. 4 

3,481.4 

Sept. 6, 1904. 

5,412 

279.8 

818.9 

1,316.7 

611.0 

699.7 

3,726.2 

Aug. 25, 1905. 

5,757 

320.1 

854.1 

1,382.2 

689.1 

753.0 

3,998.5 

Sept. 4, 1906. 

6,137 

374.7 

828.0 

1,502.0 

776.1 

818.1 

4,299.0 

Aug. 22, 1907. 

6,544 

428.2 

832.9 

1,648.7 

899.5 

869.2 

4,678.5 

Sept. 23, 1908. 

6,853 

395.9 

922.7 

1,582. 4 

852.1 

997.5 

4,750.6 

Sept. 1, 1909. 

6,977 

441.5 

957.3 

1,698.4 

971.5 

1,060.1 

5,128.8 

Sept. 1, 1910. 

7,173 

524.3 

939.1 

1,842.5 

1,068.3 | 

| 1,093.0 

5,467.2 

June 7, 1911. 

7,277 

529. 7 

953.8 

1,885.1 

1,124.7 

1,117.5 

5,610.8 

June 14, 1912. 

7,372 

571.3 

985.4 

1,973.4 

1,19S. 5 

1,225.3 

5,953.9 


The columns numbered 3, 5, and 6 are those which represent paper 
potentially available under the act. 

The fifth paragraph of section 14 forbids the rediscounting for any 
one bank of an aggregate of notes and bills bearing the signature or 























52 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

indorsement of any one person or concern, this being a repetition of 
the prohibition of similar kind which is contained in the national 
banking act. A new feature is, however, found in the last sentence 
of the paragraph in question which reads as follows: “But this 
restriction shall not apply to the discount of bills of exchange drawn 
in good faith against actually existing values.” This exception or 
exemption has long been asked for in the interest of legitimate busi¬ 
ness transactions. Obviously when a bill of exchange is secured by 
bills of lading and other documents accompanying it, it is primarily 
dependent for liquidation upon this unquestionably marketable 
wealth. There is therefore no reason for limiting the amount of the 
discount to be granted by any reference to the resources of the person 
applying for the accommodation or by the capital and surplus of the 
bank granting the discount, that being merely a question of banking 
judgment, while the bill itself is salable and will presumably be pro¬ 
tected at the point where it is presented. 

Summing up the terms of section 14, therefore, it may be said that 
the section simply applies to the Federal reserve banks the same 
general grants of authority and limitations thereon carried in the 
national-bank act with respect to the national banks, except that it 
more carefully limits the length of the paper to be rediscounted and 
the purpose for which it is drawn, while it opens the acceptance 
business to national banks and permits the rediscount of acceptance 
paper. The latter class of paper is limited to export and import 
operations in order to prevent any possibility of undue use of the 
provision at first by banks not thoroughly conversant with the work¬ 
ing of the idea owing to lack of experience with this type of credit. 

section 15. 

It will have been observed that the transactions authorized in sec¬ 
tion 14 were entirely of a nature originating with member banks and 
involving a rediscount operation. It is clearly necessary to extend 
the permitted transactions of the Federal reserve banks beyond 
this very narrow scope for two reasons: 

1. The desirability of enabling Federal reserve banks to make their 
rate of discount effective in the general market at those times and 
under those conditions when rediscounts were slack and when there¬ 
fore there might have been accumulation of funds in the reserve banks 
without any motive on the part of member banks to apply for redis¬ 
counts or perhaps with a strong motive on their part not to do so. 

2. The desirability of opening an outlet through which the funds 
of Federal reserve banks might be profitably used at times when it 
was sought to facilitate transactions in foreign exchange or to 
regulate gold movements. 

In order to attain these ends it is deemed wise to allow a reserve 
bank, first of all, to buy and sell from anyone whom it chooses 
the classes of bills which it is authorized to rediscount. The reserve 
bank evidently would not do this unless it should be in a position 
which, as already stated, furnished a strong motive for so doing. 
Outright purchases in the open market would of course require the 
payment of the face of the paper less discount, whereas rediscount 
operations would require simply the holding of a reserve of 33J per 
cent behind the notes issued or deposit accounts created in the course 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


53 


of the rediscount operation. Apart from this fundamental permis¬ 
sion, it was deemed wise to allow the banks to buy coin and bullion 
and borrow or loan thereon and to deal in Government bonds. The 
power granted in subsection (d) to fix a rate of discount is an obvious 
incident to the existence of the reserve banks, but the power has been 
vested in the Federal reserve board to review this rate of discount 
when fixed by the local reserve bank at its discretion. This is 
intended to provide against the possibility that the local bank might 
be establishing a dangerously low rate of interest, which the reserve 
board, familiar as it would be with credit conditions throughout the 
country, would deem best to raise. 

The final power to open and maintaining banking accounts in for¬ 
eign countries for the purpose of dealing in exchange and of buying 
foreign bills is necessary in order to enable a reserve bank to exercise 
its full power in controlling gold movements and in facilitating pay¬ 
ments and collections abroad. 

section 16. 

Section 16 provides for the transfer of all moneys now held in the 
general fund of the Treasury to the reserve banks, disbursements to 
be thereafter made bv check upon such banks. The general philos¬ 
ophy of this proposed change and the conditions which imperatively 
demand it have been sufficiently sketched at an earlier point in 
this report, and it is only necessary here to examine the actual 
working of the provision. Twelve months are allowed to effect the 
transfer, this being deemed a sufficient time in view of the compara¬ 
tively low state of the Government’s deposits in banks to-day. The 
apportionment of the funds between banks is required to be made 
as equitably as possible between the different sections of the country, 
this proviso being practically a repetition of the language found in 
the national-bank act to-day. The Federal reserve board and the 
Secretary of the Treasury are left with full power to fix a rate of 
interest from month to month on the deposits, this to be not less than 
one-half of 1 per cent. 

How large a transfer of funds would be effected under the terms 
of this provision, and how such a transfer would affect the Treasury 
itself, will depend upon the condition of the Treasury at the time of 
the passage of the act, but an approximate idea may be formed from 
the daily Treasury statement, a copy of which is hereto appended. 

section 17. 

The subject of note issue has occasioned the committee no little 
concern, but after due and full consideration it has determined that 
the proper mode of note issue to be provided for in the proposed act 
is that of an issue of government Treasury notes, obligations of the 
United States and receivable for all taxes, customs, and other public 
dues. Recognizing that the country is now definitely committed to 
the immediate redemption of all existing paper currency in lawfu 
money, upon demand, the proposed measure requires the redemption 
of such notes both at the Treasury and at each of the Federal reserve 
banks at par when requested. 


54 CHANGES IN THE BANKING AND CURRENCY SYSTEM* 


Recognizing, moreover, that the regulation of the volume of cur¬ 
rency in circulation—as distinct from the underlying money of ulti¬ 
mate redemption—is a delicate function requiring to be adjusted in 
accordance with the commercial, agricultural, and industrial needs ol 
the country, the power of getting out the notes by making applica¬ 
tion for them is by the bill given to Federal reserve banks, they being 
required to furnish the local Federal reserve agent with collateral 
security consisting of rediscounted notes and bills to a sum equal to 
the amount of the notes issued to the Federal reserve bank in question. 
These operations, connected with the issue and retirement 01 reserve 
notes, are to be carried on through the local Federal reserve agent, 
who is daily to notify the reserve board of issues and withdrawals. 
Such reserve notes are required to be protected by a specially segre¬ 
gated reserve fund of 33J per cent in lawful money. 

The mode of protecting the notes is an essential and fundamental 
element in this section of the bill. A first lien on all assets and a 
Government guaranty of the goodness of the notes obtained by 
making them liabilities of the United States render the security 
behind the issue absolute, both as to immediate and as to ultimate 
conditions. It may thus be fairly said that the protection of the 
notes as distinct from their redemption is as follows: (1) Govern¬ 
ment promise to receive them and to be ultimately responsible for 
them; (2) first lien on all the assets of the bank issuing them; (3) 
direct lien on 100 per cent of prime paper specially selected and segre¬ 
gated for their protection; (4) claim on 33J per cent of money drawn 
from the general funds of the bank and re-created as fast as notes are 
redeemed, that there may always be a special fund for the immediate 
protection of the issues. 

While the notes are, under the new section, allowed to carry on 
their faces a letter and serial number distinguishing them from 
others, they are not suffered to bear the name of the bank through 
which they are issued, and the fundamental feature of this peculiar 
“Government” character is that they are required to be redeemed 
at the counter of every Federal reserve bank, no matter whether such 
bank has issued any notes, and no matter how many notes it may 
have issued. This signifies that every Federal reserve bank is a 
redemption agency for the whole of the issue, and the question at 
once arises, Out of what will such reserve bank redeem the notes 
should a great quantity be thrown in upon it? The section provides 
that such a bank may, if it chooses, (1) pay the notes out of the 33J 
per cent fund of lawful money or gold held by it for the redemption 
of its own notes, re-creating such fund at once from any other funds 
held by it for its other liabilities, (2) charge the notes off against 
Government deposits held by it (and against which, of course, there 
is a reserve of 33J per cent of lawful money), which would mean that 
such bank would at once send the redeemed notes to the Treasury 
and get back an equal amount of fresh Government deposits, or (3) 
present the notes presented to it for redemption, although issued 
by some other Federal reserve bank, to the Treasury for redemption. 
In either of these latter cases, of course, the result would be to throw 
on the Treasury the work of getting back the amount of the redeemed 
notes by sending them to the bank, through which they were origi¬ 
nally issued. In addition to these provisions, of course, it is required 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 55 

in other sections of the bill that every bank in the system shall 
receive the notes on deposit at par, and that they shall be payable 
to the Government for taxes, dues, and other public requirements. 

All this shows how the notes are protected and how they can easily 
be redeemed by a man who is desirous of getting lawful money for his 
notes without any cost to himself. There is little doubt that his 
interests under the provisions of the measure are quite thoroughly 
safeguarded. But there remains the general question whether the 
public requirement of elasticity has been met and provided for. 
Elasticity must be considered from two standpoints—that of expan¬ 
sion and that of contraction. As to expansion, the regulatory 
mechanism is the Federal reserve board, which is given the power to 
veto applications for notes. The board, however, can not issue 
notes unless they are applied for and accompanied by a tender of 
proper commercial paper. This at least seems to assure that they 
will not be hastily or rashly overissued. The contraction feature is 
more difficult. In attempting to guard against the danger that the 
notes might remain in circulation after the need for them had passed, 
the bill makes the following provisions: (1) The notes can not be 
used in bank reserves; (2) the notes are not to be legal tender; 
(3) the notes can not be paid out by any Federal reserve bank (when 
not at first issued by it) under penalty of a tax of 10 per cent on their 
face value; (4) every Federal reserve bank is directed, upon receiv¬ 
ing the note of another reserve bank, to (a) either send it direct to 
the bank that issued it, ( b ) to send it to the Treasury, charging it 
off against deposits, or (c) to present it to the Treasury for redemp¬ 
tion in. lawful money. On the other hand the Treasury is directed 
when it gets such notes in ordinary receipts to have them redeemed 
out of a 5 per cent fund kept with the department for that purpose, 
and then to send them home for ultimate redemption. The belief is 
freely expressed that these provisions will maintain the notes at par 
everywhere and will also prevent them from expanding or remaining 
out after the need for them has gone by. 

There is a final paragraph in section 17 relating to the collection 
at par and without charge for exchange of certain classes of checks. 
The provision is that every Federal reserve bank shall receive on 
deposit at par the following classes of items: 

1. Checks and drafts drawn upon any of its depositors. 

2. Checks and drafts drawn by any of its depositors upon any other 
depositor. 

3. Checks and drafts drawn by any depositor in any other Federal 
reserve bank upon funds to its credit in such reserve bank. 

The object of these provisions is twofold: 

1. To establish par transfers of funds among the banks in each 
Federal reserve district. 

2. To establish par transfers of funds between Federal reserve 
districts. 

Precisely how much difficulty and cost will be incurred by the 
Federal reserve banks in carrying out the provisions of this section 
can not be precisely calculated. It can, however, be positively 
stated that such expenditures will be very much less than those 
incurred by banks at the present day in carrying through their 
exchanges. The proposed provision will eliminate the numerous 


56 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


and well-founded complaints of unjust charges for exchange; and, 
while it will prevent certain banks from profiting as they now do by 
exchange transactions, it will correspondingly benefit the community. 
The committee is well aware that the operation of this section will 
undoubtedly relieve some members of the community of greater 
burdens than others. It does not, however, consider the fact that 
some persons have been suffering an unnecessary burden under 
existing circumstances, a good reason for refusing or failing to pro¬ 
vide for an important public function. 

That this function of exchange may be effectively carried out, and 
that other duties connected with relations between the several banks 
of the system may be wisely, promptly, and effectively carried through, 
the proposed bill confers upon the Federal reserve board the power 
to require each Federal reserve bank to perform the functions of a 
clearing house, and at its discretion to require some one of them to 
act as a clearing house for all the others or at its own discretion to 
act as a clearing house in this way itself. 

SECTIONS 18 AND 19. 

Sections 18 and 19 may best be treated together, as they jointly 
provide for the disposal of existing national-bank notes and for the 
refunding of the bonds now held by the banks behind these notes. 
The general views entertained by the committee with respect to bank¬ 
note issue in general and the treatment of existing national-bank 
notes in particular have been sufficiently set forth at an earlier point 
in this report. It remains here to outline the exact steps that have been 
recommended to attain the desired end, and to indicate the probable 
cost and incidental problems connected with each step in the process. 
What has been done in the bill is as follows: 

1. Provision has been made for paying at the end of 20 years the 
existing outstanding 2 per cent bonds. This is a manifest matter of 
justice. 

2. Meantime banks have been permitted at their discretion to pre¬ 
sent one-twentieth of their bond holdings each year for conversion 
into 3 per cent bonds, and in the event they do not so present them 
the Secretary of the Treasury is authorized "to reassign the quotas of 
bonds not taken up to other banks which are authorized to in that 
case secure a corresponding amount of additional conversions. 

3. During the 20-year period any bank may increase or decrease its 
circulation at pleasure, subject to the maximum limitation prescribed 
by law. 

4. However, from the date of the passage of the act no national 
bank is to be required to hold any United States bonds as security 
for circulation if it chooses to retire such circulation—in other words, 
the compulsory bond-purchase requirement of existing law is repealed. 

It will be seen that the only interference with the existing demand 
for bonds provided under these sections is the withdrawal of the com¬ 
pulsory bond purchase now required. Precisely how great a limita¬ 
tion of the bond demand this would furnish can not be precisely 
stated. For the last year for which full report was made by the Comp¬ 
troller of the Currency (1912) the net amount of bonds purchased by 
national banks to protect circulation was about $16,000,000. This, 


CHANGES IN THE BANKING AND CURRENCY SYSTEM, 57 

however, was far in excess of the amount of bonds necessarily to be 
purchased under the compulsory-purchase requirement, inasmuch as 
many banks bought more bonds than they were obliged to secure 
under the terms of the national-bank act. There is no reason why 
this demand for bonds should not continue, as in fact it undoubtedly 
will. The capitalization of banks organized in the year in question 
was $16,080,000, while the amount of bonds purchased was about 
the same. If the amount of bonds required to be purchased be 
assumed to have been 25 per cent of the face of the capital of the 
newly organized banks it would have been $4,000,000, and this may 
be taken as considerably above the amount of compulsory demand 
for bonds for which there will no longer be legal basis should the 
present bill be enacted into law. As against this the Government 
stands ready to redeem in the form of 3 per cent bonds, roughly speak¬ 
ing, $37,000,000 per annum, and it is only reasonable to suppose that 
under the most unfavorable conditions the quantity of 2 per cent 
bonds which wi 1 be converted into threes in this way will be far in 
excess of the amount of the compulsory demand for twos which is 
now cut off. 

The future of the 3 per cent bonds, should the conversions go on at 
the rate of 5 percent per annum,may be open to some question. The 
committee has, however, consulted able expert opinion upon this 
subject and has found a practical unanimity of view to the effect 
that at least $50,000,000 per annum in 3 per cent bonds can and will 
be absorbed in the United States at par. Should such prove not to 
be the case, the banks have only to retain their present bonds and 
continue the issue of circulation thereon, but it is confidently believed 
that no such situation will occur. The committee looks forward with 
assurance to the conversion of a very considerable percentage, if not 
all, of the permitted 5 per cent in each successive year during the 
earlier part at least of the 20-year period. As the 20-year period 
draws toward a close it is quite likely that some bondholders will 
prefer to hold their bonds for redemption, but in the meantime there 
will have been a sufficient retirement of national-bank notes to impart 
to the new currency to be put out through the Federal reserve banks 
the desired quality of elasticity. In order to improve the market for 
the 3 per cent bonds, section 19 provides that they are to be free from 
all taxation both as to income and principal. It will be remembered 
that the status of the bonds is further helped in some measure by the 
provision made in the earning section (sec. 7) for devoting the Gov¬ 
ernment share of reserve bank earnings to the redemption of bonds. 
As a corollary of the bond-refunding plan and of the note section the 
committee has deemed it wise to insert in section 19 a prohibition 
upon the further use of the extra-legal substitutes for circulating 
notes which have heretofore done duty in times of panic under the 
form of clearing-house certificates, cashiers ’ checks, and various sub¬ 
stitutes for actual money which have been illegally paid out by banks 
to their creditors in lieu of the payment in the usual forms of cur¬ 
rency employed by them during normal times. No such expedients 
would have been permitted save under severe stress, and with a suit¬ 
able provision for an elastic note issue based upon commercial paper 
they should not longer be suffered to continue in use. 


58 


CHANGES IN THE BANKING AND CURRENCY SYSTEM 


The amount of 2 per cent and other bonds now held behind cir¬ 
culation and affected by the provisions of sections 18 and 19 may be 
recapitulated as follows: 

Bonds held in trust for national banks, Sept. 2, 1913. 


Bonds held for national banks. 


Kind of bonds. 


Rate 
of in¬ 
terest. 


GOVERNMENT. 


I. 


II, 


'TJ. S. loan of 1925..at par.. 
U. S. loan of 1908-1918, 

at par. 

U. S. Panama of 1961, at 

par. 

U. S. consol of 1930.at par.. 
U. S. Panama of 1936, at 

par. 

U. S. Panama of 1938, at 

par. 

Philippine loans...at par.. 

Porto Rico loans_do_ 

D istr ict of Columb ia. do_ 

Territory of Hawaii, 3£ per 
cent bonds at 90 per cent 
of par; all other Hawai¬ 
ian bonds at market 
value, not exceeding par. 


4 

3 

3 
2 

2 

2 

4 
4 

3.65 


(0 


MISCELLANEOUS. 


Philippine Railway Co_ 

Manila Railroad Co. 

III. -! At 90 per cent of market 

value, not exceeding 90 
per cent par. 

IV. State, county, city, and 

other securities 2 . 


4 

4 


0 ) 


Total 


Total 

amount 

outstanding. 


$118,489,900 

63,945,460 

50,000,000 
646,250,150 

54,631,980 

30,000,000 
16,000,000 
5,225,000 
6,970,650 


6,515,000 

8,551,000 

6,735,000 


Total. 

To secure 
circulation. 

To secure c 
public n 

Value at 
par. 

leposits of 
soneys. 

Value at 
rate ap¬ 
proved by 
depart¬ 
ment. 

$37,669,400 

$34,181,700 

$3,487,700 

$3,487, 700 

25,828,900 

22,182,200 

3,646,700 

3,646,700 

17,110,200 


17,110,200 

17,110,200 

615,921,100 

603,773,900 

12,147, 200 

12,147,200 

54, 242,360 

52,962,860 

1,279,500 

1,279,500 

29,444,140 

28,897,140 

547,000 

547,000 

5,967,000 


5,967,000 

5,967,000 

1,821,000 


1,821,000 

1,821,000 

933,000 


933,000 

933,000 

1,978,000 


1,978,000 

1,930,900 

898,000 


898,000 

588,571 

10,000 


10,000 

6,750 

17,951,137 


17,951,137 

11,747,904 

809,774,237 

741,997,800 

67,776,437 

61,213,425 


1 Various. 

2 As security for deposits made in connection with crop movement Government bonds are accepted at 
par, other bonds at 75 per cent of market value, and commercial paper at 65 per cent of face value. 

When banks have occasion to withdraw bonds held by the Treasurer to secure deposits of public moneys, 
the following shall be the order of withdrawal: Group IV, Group III, Group II, and Group I. 

Bonds within a group may be interchanged by banks if desired, but bonds in a lower group may not be 
substituted for those in a higher group, except'that an initial substitution of bonds of a lower group for 
those of a higher group may be made to an amount not to exceed 30 per cent of the total security value of 
bonds held for a particular bank. National-bank depositaries which have not as yet taken out the full 
amount of circulation authorized by law may withdraw United States 2s and substitute for them bonds 
in Group II, provided the 2s as withdrawn shall be used as security for additional circulation. 



































CHANGES IN THE BANKING AND CURRENCY SYSTEM. 59 


SECTION 20. 

Section 20 seeks to readjust the reserve requirements now pro¬ 
vided by the national banking act in such a way as to make them 
conform to the dictates of scientific banking, and to adjust them 
to the provisions of the proposed bill. The following main objects 
have been had in mind: 

1. To abolish entirely the present system of redeposited or “pyra¬ 
mided” reserves. 

2. To establish a moderate required reserve actually to be held 
in cash in the vaults of the banks. 

3. To prescribe a secondary reserve to take the form of a credit 
with the Federal reserve banks. 

Several serious problems at once suggest themselves as the result 
of any effort to attain these objects. In the first place, the present 
conditions have grown up over a period of 50 years, and it is not 
desirable, even if it were safe, to disturb them roughly. Secondly, 
it is considered that existing reserve requirements, being based 
upon the state of affairs in which many mdependent banks were 
working without coordination it is possible to reduce the actual 
amount of reserves to be held. Finally, it is noted that in making 
the change suggested careful account must be taken of the total 
sums in cash as distinct from those in balances req uired to be held 
by existing law, and that they should be contrasted with the sums 
in cash and balances prescribed under the proposed bill. In sur¬ 
veying the situation a beginning may be made by considering with 
care the reserve requirements of the national bank act. These are 
as follows: 


RESERVE CITIES AND RESERVE REQUIREMENTS. 

120. Sec. 5191. Every national banking association in either of the following cities, 
Albany, Baltimore, Boston, Cincinnati, Chicago, Cleveland, Detroit, Louisville, 
Milwaukee, New Orleans, New York, Philadelphia, Pittsburg, St. Louis, San Fran¬ 
cisco, and Washington, shall at all times have on hand, in lawful money of the United 
States, an amount equal to at least twenty-five per centum of the aggregate amount of 
[-its notes in circulation and ] its deposits; and every other association shall at all times 
have on hand, in lawful money of the United States, an amount equal to at least fifteen 
per centum of the aggregate amount [o/ its notes in circulation and\ of its deposits. 
Whenever the lawful money of any association in any of the cities named shall be 
below the amount of twenty-five per centum of its [ circulation and"\ deposits, and 
whenever the lawful money of any other association shall be below fifteen per centum 
of its [ circulation and\ deposits, such association shall not increase its liabilities by 
making any new loans or discounts otherwise than by discounting or purchasing bills 
of exchange payable at sight, nor make any dividends of its profits until the required 
proportion, between the aggregate amount of its ^outstanding notes of circulation andjj 
deposits and its lawful money of the United States, has been restored. And the 
Comptroller of the Currency may notify any association whose lawful money reserve 
shall be below the amount above required to be kept on hand to make good such 
reserve; and if such association shall fail for thirty days thereafter so to make good its 
reserve of lawful money, the comptroller may, with the concurrence of the Secretary 
of the Treasury, appoint a receiver to wind up the business of the association, as pro¬ 
vided in section fifty-two hundred and thirty-four. 

Note. —This section is amended by the act of June 20, 1874, section 2, which pro¬ 
vides that no reserve need be held against circulation. Said act follows section 5192. 
Act of March 3, 1903, amending act of March 3, 1887, providing for additional reserve 
cities, follows section-5192. Provisions relating to redemption of circulating notes, 
acts June 20, 1874, March 3, 1875, and July 14, 1890, follow Revised Statutes, 5192. 
Provisions relating to redemption of old notes of banks extending their corporate 


60 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


existence, act July 12, 1882, follows Revised Statutes, 5136. Leavenworth, Kansas, 
was included as a reserve city in the original act, but was struck out March 1, 1872. 
Words “lawful money ” construed by Attorney General as including all that is legal 
tender. (Opin. Atty. Gen., 17; 123.) 

WHAT MAY BE COUNTED AS RESERVE. 

121. Sec. 5192. Three-fifths of the reserve of fifteen per centum required by the 
preceding section to be kept may consist of balances due to an association, avail¬ 
able for the redemption of its circulating notes, from associations approved by the 
Comptroller of the Currency, organized under the act of June three, eighteen hundred 
and sixty-four, or under this title, and doing business in the cities of Albany, Balti¬ 
more, Boston, Charleston, Chicago, Cincinnati, Cleveland, Detroit, Louisville, Mil¬ 
waukee, New Orleans, New York, Philadelphia, Pittsburg, Richmond, Saint Louis, 
San Francisco, and Washington. Clearing-house certificates, representing specie or 
lawful money specially deposited for the purpose, of any clearing-house association, 
shall also be deemed to be lawful money in the possession of any association belong¬ 
ing to such clearing house, holding and owning such certificate, within the preceding 
section. 

Note. —Leavenworth, Kansas, was included as a reserve city in the original act but was struck out 
March 1, 1872. Charleston and Richmond not being included in the list of reserve cities enumerated in 
section 5191, the banks of which are required to hold a reserve of twenty-five per centum of their net 
deposits, the Comptroller of the Currency has never approved any banks in said cities as reserve agents. 

LAWFUL MONEY RESERVE TO BE DETERMINED BY DEPOSITS. ACT JUNE 20, 1874. 

122. Sec. 2. That section thirty-one of “the national-bank act” be so amended 
that the several associations therein provided for shall not hereafter be required to 
keep on hand any amount of money whatever, by reason of the amount of their respec¬ 
tive circulations; but the moneys required by said section to be kept at all times on 
hand shall be determined by the amount of deposits in all respects, as provided for 
in the said section. 

Note. —Section 31 of “the national-bank act” is incorporated in sections 5191, 5192, Revised Statutes. 
Section 1 of act June 20, 1874, precedes section 5133, Revised Statutes. 

NO RESERVE NEED BE HELD AGAINST DEPOSITS OF PUBLIC MONEY. ACT MAY 30, 1908. 

123. Sec. 14. That the provisions of section fifty-one hundred and ninety-one of 
the Revised Statutes, with reference to the reserves of national banking associations, 
shall not apply to deposits of public moneys by the United States in designated 
depositaries. 

PROVISIONS FOR REDEEMING CIRCULATION—FIVE PER CENT REDEMPTION FUND 

ACT JUNE 20, 1874. 

124. Sec. 3. That every association organized or to be organized under the provisions 
of the said act and of the several acts amendatory thereof shall at all times keep and have 
on deposit in the Treasury of the United States, in lawful money of the United States, 
a sum equal to five per centum of its circulation, to be held and used for the redemp¬ 
tion of such circulation; which sum shall be counted as a part of its lawful reserve, as 
provided in section two of this act; and when the circulating notes of any such asso¬ 
ciations, assorted or unassorted, shall be presented for redemption, in sums of one 
thousand dollars, or ajiy multiple thereof, to the Treasurer of the United States, the 
same shall be redeemed in [ United States notes | All notes so redeemed shall be 
charged by the Treasurer of the United States to the respective associations issuing 
the same, and he shall notify them severally on the first day of each month, or oftener, 
at his discretion, of the amount of such redemptions; and whenever such redemp¬ 
tions for any association shall amount to the sum of five hundred dollars, such asso¬ 
ciation so notified shall forthwith deposit with the Treasurer of the United States 
a sum in United States notes equal to the amount of its circulating notes so re¬ 
deemed. And all notes of national banks worn, defaced, mutilated, or otherwise 
unfit for circulation shall, when received by any assistant treasurer, or at any 
designated depository of the United States to be forwarded to the Treasurer of the 
United States for redemption as provided herein. And when such redemptions 
have been so reimbursed, the circulating notes so redeemed shall be forwarded to 
the respective associations by which they were issued; but if any of such notes are 
worn, mutilated, defaced, or rendered otherwise unfit for use, they shall be forwarded 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


61 


to the Comptroller of the Currency and destroyed and replaced as now provided by 
law: Provided , That each of said associations shall reimburse to the Treasury the 
charges for transportation and the costs for assorting such notes; and the associations 
hereafter organized shall also severally reimburse to the Treasury the cost of engrav¬ 
ing such plates as shall be ordered by each association respectively; and the amount 
assessed upon each association shall be in proportion to the circulation redeemed, 
and be charged to the fund on deposit with the Treasurer: And 'providedfurther , That 
so much of section thirty-two of said national-bank act requiring or permitting the 
redemption of its circulating notes elsewhere than at its own counter, except as pro¬ 
vided for in this section, is hereby repealed. 

Note.— -Section 12 of act of May 30, 1908, provides that notes of national banking associations shall be 
redeemed in lawful money of the United States. (See said section 12, page 49, ante.) 

Section 32 of national-bank act is section 5195, Revised Statutes. 

We may now contrast with the requirements which are thus laid 
down by existing national-bank legislation those which are estab¬ 
lished in the proposed legislation. In the following tabular view is 
given for each class of national banks—central reserve city, reserve 
city, and country—the provisions which it is proposed to create 
under the new legislation: 


Reserve requirements. 
COUNTRY BANKS. 



Up to 14 
months. 

14 

months 
to 36 
months. 

After 36 
months. 

Total reserve renHired_____ 

Per cent. 
12 

Per cent. 
12 

Per cent. 
12 



Cash in own vaults.... 


5 

5 

5 

On deposit with Federal reserve bank, required. 

3 

5 

5 

On deposit in reserve or central reserve city or in Federal reserve bank or 
in cash, ontional with bank_ 

4 

2 


In cash or on deposit in Federal reserve bank, optional with bank 




2 





Total reserve_ 


12 

12 

12 



Date .—“From and after the date set by the Secretary of the Treasury and officially 
announced by him as hereinbefore provided.” 

Refers to .—“That within 60 days from and after the date when the Secretary of the 
Treasury shall have officially announced, * * * the fact that a Federal reserve 
bank has been established.” 


RESERVE CITY BANKS. 



60 days. 

60 days 
to 14 
months. 

After 36 
months. 

Total reserve required ..... 

Per cent. 
20 

Per cent. 
18 

Per cent. 
18 

Cash in own vaults . ................. 

10 

9 

3 

6 

9 

5 

r>n deposit with Federal reserve, bank, required. 

On deposit in central reserve city, optional" with bank. May be cash or on 
deposit with Federal reserve bank . 

10 

On cieposit with Federal reserve bank or in cash, optional with bank 
(see note) . ... 

4 

Total reserve ______ 



20 

18 

18 



Date .—“From and after the date set by the Secretary of the Treasury for the incor¬ 
poration of the Federal reserve bank.” 

Again ,—“For 60 days from the date set by the Secretary for the organization of the 
reserve bank.” 






































62 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


BANKS IN CENTRAL RESERVE CITIES. 



60 days. 

60 days 
to 14 
months. 

After 14 
months. 

Total reserve required . 

20 

18 

18 

Cash in own vault .. . 

10 

9 

9 

On deposit with Federal reserve bank: 

Optional 

Required. 


3 

6 

5 

4 

On deposit with Federal reserve bank or in cash, optional with banks.... 

Total reserve. 

10 

20 

18 

18 



Two questions present themselves in connection with these reserve 
requirements—the first, How far would the banks be able to comply 
with them without sacrifice; and the second, How far would this 
change seem to be desirable ? These may be dealt with in the reverse 
order. 

In outlining the general philosophy of the proposed banking bill it 
was pointed out that the existing system of redeposited reserves gives 
rise to cheap money for stock-exchange speculation in the centers 
while it fails to provide in times of panic a reserve upon which the 
country can draw with assurance, because at such times stock-ex- 
change securities can not be easily liquidated, so that call loans are 
unavailable as a resource, and the city banks in self-defense have 
deemed themselves warranted in suspending specie payments. It is 
contended, however, that these difficulties and irregularities of the 
existing system are mere blemishes upon the surface of an otherwise 
desirable state of affairs, and that there is good and sufficient economic 
reason for maintaining the present system of redeposited reserves at 
least in part. This claim may be reduced to a series of propositions, 
as follows: 

1. The redeposited reserves are placed with the city banks not for 
stock speculation, but in large measure at least to supply exchange 
funds upon which the depositing banks may draw. 

2. The redeposited balances must be kept with the banks which 
now hold them, because the country banks look to these city banks 
for accommodation and the latter gauge the amount of accommoda¬ 
tion to be granted them by the size of the balances. 

3. The country banks, and in general all banks making the rede¬ 
posits get a rate of interest thereon. They are thus able to make use 
of a reserve which would otherwise be “dead,” and which when held 
in cash or in the Federal reserve banks will yield them no revenue, 
the latter banks being forbidden by the terms of the bill to pay 
interest on deposits. 

These contentions are worthy of careful study, because they arc 
widely urged. 

Regarding the first point—the question of exchange funds-Ht will 
be noted that the proposed bill has met the requirement for such 
funds by specifically directing Federal reserve banks to receive 
specified classes of checks at par. It has thus largely wiped out 
the necessity for any such balance as now held. It may be noted, 
however, that there is in the bill nothing whatever to prevent the 















CHANGES IN THE BANKING AND CURRENCY SYSTEM. 63 

banks from maintaining any amount of such balances with city banks 
fcs they desire. Clearly if the balances with the city banks are ex¬ 
change balances they are not reserves and there is no reason for 
regarding them as such. 

^ The second point already noted has even less force than the first. 
Not only does the proposed bill provide more extensive facilities for 
rediscount than have ever been known, but even it if did not do so, 
and even if, as alleged, there are many kinds and classes of security 
not eligible for rediscount under the bill which country banks can 
use as a basis for accommodation only with city banks, it would still 
remain true that this does not afford any warrant for demanding the 
maintenance of the existing situation. The refusal to grant accom¬ 
modation except in proportion to the amount of balance held by the 
would-be borrower is purely a matter of business practice. If a con¬ 
dition should be created under the proposed biff such that banks 
could not maintain the present reserve city deposits, it is hardly to 
be expected that the reserve city banks would immediately injure 
themselves and destroy their own source of business profits by refusing 
to buy good marketable paper or to extend loans upon sound security 
merely because conditions had altered and the large balances of for¬ 
mer days were no longer kept with them. 

As for the third contention—the loss of interest to depositing banks 
due to the sacrifice of their 2 per cent on reserve balances—the argu¬ 
ment against the proposed change almost degenerates into absurdity. 
The measure so greatly broadens the scope of banking business as to 
open many new avenues of profitable investment, while the sacrifice 
of the 2 per cent now customarily paid is not only no loss to the com¬ 
munity but represents the abolition of a long-standing evil which has 
drawn funds to places where they were not needed and away from 
those where they were. 

In the ultimate analysis, the whole question simmers down to an 
issue whether the amount of reserve prescribed under the proposed 
bill is or is not excessive, and whether it can or can not be readily 
furnished by banks under the terms of the suggested legislation. The 
existing system is not backed either by the custom of other countries, 
by abstract logic, by the dictates of past experience, or by any other 
considerations. The only problem in the case is that of determining 
the correct amount of reserves to be required by the banks, and then 
of making the transition to the new basis under proper conditions. 

The next step in the study of the proposed requirements is therefore 
an analysis of the ability of the banks to make the transition. The 
following computations may first be examined: 

1. The biff provides in section 20 for a revision of the existing 
reserves of national banking associations. 

2. The present reserve system recognizes three classes of banks: 
(a) Country banks, (&) reserve city banks, (c) central reserve city 
banks. Country banks are required to hold 6 per cent of their deposit 
liabilities in lawful money and may hold 9 per cent in balances with 
other banks. Reserve city banks are required to hold 12J per cent of 
their deposits in lawful money and may hold 12J per cent in balances 
with other banks in central reserve cities. Central reserve city banks 
are required to hold 25 per cent of their deposits (including those of 
other banks with them) in lawful money in their own vaults. 


64 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


3. The bill aims to transfer these reserves away from banks other 
than those to which they belong, so that ultimately bank reserves 
will be held partly (a) in the vaults of the banks to which they 
belong and ( o) partly in the reserve banks to be created under it, 
the reserve banks thus created taking the place of existing reserve 
city and central reserve city banks in their relation to others. 

4. In carrying out this plan, the bill contemplates that ultimately 
reserves shall be as follows: (a) Five per cent of the outstanding 
deposits of all banks to be carried in the new reserve banks; ( b ) 5 per 
cent of the deposits of present country banks to be carried in cash 
in their own vaults; (c) 2 per cent of the deposits of present country 
banks to be carried either in cash in their own vaults or as a balance 
with new reserve banks; (d) 9 per cent of the deposits of present 
reserve city and central reserve city banks to be carried in cash in 
their own vaults; ( e ) 4 per cent of the deposits of present reserve 
city and central reserve city banks to be carried either in cash in 
their own vaults or as balances with the new reserve banks. 

5. It is of course evident that the “balances’ ? spoken of can be 
obtained by rediscounting paper with the new reserve banks. 

6. From the foregoing it is clear that as some discretion is left to 
the banks about their reserves, the exact position of those reserves 
at any given time can not be predicted. Maximum and minimum 
limits can, however, be fixed. This is done as follows: 

7. At the date of June 4, 1913 (comptroller’s last report), the 
present bank reserve in central reserve cities was $409,601,424, 
held in cash. 

At the same date the reserve which would have been required under 
the new plan as above sketched would have been 9 per cent of net 
deposits then subject to reserve requirements in cash and 9 per cent 
as a maximum in balances with the new reserve banks, as follows: 


To be held in cash. $141,127, 835 

To be held as balances. 141,127, 835 


Total. 282,255,670 

From this it is clear that if the balances under the new plan were 
established by taking actual money and putting it in the reserve 
banks the actual release of cash as compared with the present plan 
would be the difference between the total new reserve and the present 
reserve, while if the reserve balances were created by rediscounting 
the cash released under the new plan would be the difference between 
the cash required to be held under the new plan and the cash now 
actually held. That would signify: 

Maximum release of cash. $268, 473, 589 

Minimum release of cash. 127, 345, 754 

8. At the same date mentioned above the banking reserve in 
reserve cities as held by the banks was: 

Held in cash. $250, 383, 926 

Held in balances. 232, 799, 679 


Total. 483,183, 605 

Under the new plan these banks would have to hold in cash 9 
per cent of their net deposits subject to reserve requirements and a 












CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


65 


like amount in balances (maximum), which would be for the reserve 


cities as a group: 

To be held in cash. $ 175 ,128, 701 

To be held in balances. 175 ,128, 701- 

Total... 350,257,402 

Comparing these figures with the present requirements, as already 
given, it is seen that the new plan might mean either a 

Maximum release of cash. $75, 255, 225 

Or a maximum contraction of cash. 99, 873, 476 

9. At the same date mentioned above the banking reserve in 
country banks was held as follows: 

Held in cash.$289, 392, 177 

Held in balances. 310, 689,129 

Total. 600, 081, 306 

Under the new plan the cash required would be 5 per cent of their 
net deposits subject to reserve requirements and 7 per cent in 
balances (2 of this at the bank’s discretion). This would mean: 

To be held in cash. $180, 533, 642 

To be held in balances... 252, 747,100 

Total. 433, 280, 742 

On the same principles as before this would mean a maximum re¬ 
lease or contraction as follows: 

Maximu m release.$108, 858, 535 

Maximum contraction. 143, 888, 565 

10. Thus it appears that there would be a possible maximum con¬ 
traction as follows: 

Reserve city banks. $99, 973, 476 

Country banks. 143, 888, 565 

Total. 243,862,041 

Deduct central reserve city release. 127, 345, 754 


,Net contraction. 116, 514, 287 

It is also evident that the result might work out as follows: 

Released by central reserve city banks. $268, 473, 589 

Released by reserve city banks. 75, 255, 225 

Released by country banks. 108, 858, 535 

Total. 452, 587, 349 

11. Which of these results would probably be reached? Assume 
that the first (contraction) was the net result owing to banks fulfilling 
their reserve requirements by depositing cash in every instance. 
The Government balances which are now to be poured into trade 
channels through the new reserve banks will run from $200,000,000 
to $250,000,000. Bearing in mind the fact that the capital of the 
new banks has to be raised in cash, it will be seen that allowing for 
$100,000,000 of this capital the monetary situation would be left 
about the same as it is to-day except that the new reserve banks 
would be in position to add their loaning power to that of the older 

8829°—H. Kept. 69, 63-1-5 































66 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


banks. If we now assume that the transfer of reserves resulted in 
the extreme limit of expansion already referred to, it would be noted 
that the cash is released only on the assumption that the new reserve 
banks have to hold one-third in lawful money in order to make these 
discounts, it is clear that only two-thirds of $452,587,349, or about 
$300,000,000, will be released. Of this sum a certain part would 
be needed in bringing the reserves of State banks which may become 
members of the new associations up to the level which is required of 
them. How much this would be can not be positively asserted. 

12. If it be asserted that this process will lead to inflation, the 
answer to be made is that whether it will or not is a matter in the 
hands of the reserve banks which have it in their power by fixing 
their rate of discount suitably to prevent the banks from creating 
with them by rediscounting reserve balances in excess of the required 
5 per cent. If the reserve banks should do this, it would be found 
that the required 5 per cent referred to would be about $356,000,000 
while the amount which the banks at their option might or might 
not obtain in this way would be about $213,000,000, the actual cash 
required to be held by them under the new plan as already sketched, 
bemg as follows: 

Central reserve city banks. $141,127, 835 

Reserve city banks. 175,128,701 

Country banks. 180, 533, 642 

Total. 496,790,178 

Add to this the amount which the reserve banks can at their option 
make it worth while for the other banks to hold in cash or to deposit 
with them in cash, and we have a total of about $710,000,000. The 
actual cash held to-day by the banks at home and in the redemp¬ 
tion fund is about $950,000,000. Something like $240,000,000 would 
thus be released under the probable working out of the system, and 
this would be drawn upon for the other purposes already referred to. 

IMMEDIATE SHIFTING OF FUNDS. 

This review of the reserve requirements of the proposed bill is, how¬ 
ever, based entirely upon a comparison of the situation as to reserves 
at the present time contrasted with the situation which will exist at 
the end of three years after the measure has gone completely into 
operation. It was deemed wise to allow this length of time, as has 
already been elsewhere noted, for the reason that there will neces¬ 
sarily be some readjustment of loans, and if the change were to be 
suddenly made it might result in temporary embarrassment for some 
banks. The committee has made very careful inquiry into the 
length of time that should be allowed for shifting reserve require¬ 
ments in the way indicated, and the maximum period that has been 
asserted to be necessary was found to be three years. It is probable 
that the change could be effected in a very much shorter time than 
this, if it were necessary to bring it about more quickly, but the com¬ 
mittee has deemed it best to allow the full period that was thought 
desirable by the most conservative reasoners whom it consulted. 
This three-year period was the maximum mentioned either in the 
public hearings or in communications sent to the committee by 
experts with reference to the subject. 







CHANGES IN THE BANKING AND CURRENCY SYSTEM. 67 

There is, however, another phase of the question of transfer which 
has not yet been dealt with. A review oi the reserve section will 
make it clear that a period of 60 days after the creation of the reserve 
banks is fixed, during which conditions are allowed to remain as they 
are if desired by city banks, but by the end of which it is required that 
a certain transfer of reserves shall have been made to the reserve 
banks. Inasmuch as it was thought that this transfer might be difficult 
for the banks unless they were granted relief to a corresponding extent, 
the bill provides for the reduction of the reserve requirements in 
reserve and central reserve cities from 25 to 18 per cent at the end of 
the 60-day period in question. An examination of the latest returns 
for banking condition made public by the comptroller as of June 4, 
1913, and reproduced in the appendix of this report shows 
that the total net deposits subject to reserve requirements may be 
taken for purposes of discussion at $7,200,000,000. Three per cent 
of this amount is $216,000,000. This might be supplied either 
through actual transfer of cash from the banks which now hold it, 
or through the obtaining of rediscounts, or partly in one way or 
partly in the other. The committee, however, has endeavored to 
adjust the requirements of the bill so that the transfer could be 
made, as already stated, in actual cash without any inconvenience. 
The reserve banks of the central reserve cities have normally on 
hand about $400,000,000 of reserve money. Of this seven twenty- 
fifths would be released under the provision for reduction of reserves 
from 25 per cent to 18 per cent. Banks in reserve cities have nor¬ 
mally about $250,000,000 in cash, and about an equal amount in 
balances with central reserve cities. The reduction of reserve re¬ 
quirements from 25 to 18 per cent would release seven twenty-fifths 
out of this amount, or 3^ per cent in balances and 3^ per cent in 
cash—-roughly speaking, $70,000,000 in each form. 

Now, let it be assumed that the banks undertake to comply with the 
requirement of a transfer of 3 per cent of their liabilities from existing 
reserve city and central reserve city banks to the new reserve banks. 
As an extreme illustration we may suppose that the country banks 
will draw for the amount in question on the reserve city banks. As 
the deposit liabilities of the country banks are about $3,600,000,000, 
it may be supposed that the call will require about $108,000,000. How 
would the reserve city banks supply this amount—assuming that the 
call was made upon them and not directly upon central reserve city 
banks ? Presumably they would draw upon their New York corre¬ 
spondents, and upon other central reserve cities, unless by so doing they 
cut down the balances there below the figure necessary for them to 
hold in order to comply with reserve requirements. We have seen 
that they could spare only about 3 J per cent of their own outstanding 
deposits. It must be remembered, however, that they will them¬ 
selves find it necessary to shift 3 per cent of their outstanding de¬ 
posits to the reserve banks. In addition, then, to the total draft of 
$108,000,000 made upon them by the country banks, they will have 
to provide in order to meet their own requirements 3 per cent of about 
$2,000,000,000 or roughly speaking $60,000,000—a total requirement 
therefore of $168,000,000. Of this it is fair to suppose that 3i per 
cent of their present deposits or fully $70,000,000 can be directly trans¬ 
ferred in cash without damaging their position. Another $70,000,000 


68 


CHANGES IN THE BANKING AND CUEBENCY SYSTEM. 


can be clipped from their balances with central reserve cities without 
unduly reducing the latter. There would thus be needed $28,000,000 
to meet all demands in cash. 

In connection with the foregoing computation, it should, however, 
be borne in mind that 1 per cent of cash has been released in the 
country banks by the reduction of the vault cash requirements from 
6 to 5 per cent. Inasmuch as the total reserve requirements of 
country banks is cut to 12 per cent, it may perhaps be fair to sup¬ 
pose that this margin of cash could be drawn upon at the very outset 
in order to supply cash requirements. It would certainly before long 
furnish a means of extending discounts and would be available as 
a cash resource for the combined banks obviating the necessity of 
applying to the new reserve banks for rediscount accommodation. 

It must, moreover, be borne in mind in the foregoing computations 
that by the process of withdrawing funds already referred to there 
has been a corresponding reduction of deposit liabilities, with a cor¬ 
responding reduction of reserve requirements against them For 
example, if the assumption that country banks draw upon reserve city 
banks for the full amount of their transfers to the new Federal reserve 
banks be correct, the effect would be to eliminate about $100,000,000 
of deposits formerly held by reserve city banks against which reserves 
had to be carried but which having been paid off are no longer sub¬ 
ject to reserve requirements. This would be a release under the new 
reserve provisions of $20,000,000 of reserve money in the reserve 
cities. The reserve thus released might be either in cash or balances 
and it is fair to assume would be about evenly divided between the 
two. In central reserve cities if a draft for $70,000,000 were made 
by reserve city banks the result would be a release of reserve against 
deposits to a corresponding extent, thereby enabling banks to reduce 
their necessary cash holdings by one-fifth of that amount, $14,000,000, 
at the outset and by a further 2 per cent additional later on. 

Summing up these compensating or offsetting factors of the situa¬ 
tion it is a fair conclusion that the draft upon the banks during the 
first 60 days’ life of the new undertaking would be much less, so far 
as reserve requirements are concerned, than the demands made by 
present reserve requirements. 

What has been said applies entirely to the first year under the new 
measure. At the end of that time an additional transfer of 2 per 
cent of deposit liabilities must be made by the member banks. 
Assuming that their deposits remain stationary during the year on 
the basis of the report of June 4, last, the amount needed to be trans¬ 
ferred would be 2 per cent of about $6,900,000,000, or about $138,- 
000,000. If the banks had not accumulated cash during the year 
or retained the surplus cash set free at the outset, this require¬ 
ment might, so far as it consisted of an actual draft upon reserve 
and central reserve cities, have to be met by rediscounting. There 
is, however, no probability that any such situation would de¬ 
velop. On the contrary, the year’s operations would have been 
marked by a far greater ease in the loan transactions of the banks 
than any previously experienced, due to the fact that the new reserve 
system was in operation. It is fair to suppose that the amount of 
deposits would have increased considerably and that the amount of 
reserve to be transferred would have correspondingly increased. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 69 

That in the meantime the habit of resorting to the reserve banks for 
rediscounts would have grown up can not be questioned. At the end 
of the year, therefore, the banks would simply be obliged to strengthen 
their balances with the reserve banks to the extent of $138,000,000, 
and they would do this through ordinary commercial processes involv¬ 
ing no inconvenience or sacrifice whatever. If the extreme supposi¬ 
tion that the banks did not enlarge their deposits during the year, 
and that the cash originally held against them remained stationary, 
should be accepted, the fact would remain that the reserve banks 
would during that period have received some $200,000,000 from the 
Government in cash deposits and would have paid out more or less 
of it, into circulation, inevitably resulting in increasing the flow of 
cash into the vaults of the member banks while they would still 
have a comfortable margin left from the first release. If the volume 
of loans were the same at the end of the year as at the beginning it 
would be practically inevitable that they should be very much stronger 
in cash than they are at present. 

In closing this discussion of the relative strength of the banks 
before and after the transfer of reserves, it is well to emphasize once 
more the fact that the new requirements, far from causing constric¬ 
tion will cause relaxation and that the danger of the situation from 
the banking standpoint will not be in the limitation of loans but 
rather in the inflating of them—a process which, however, will remain 
well under the control of the reserve banks to be organized, by reason 
of their regulation of the rate of rediscount. 

Throughout the foregoing computations, it should be understood, 
reference has been had to the most unfavorable conditions that could 
be supposed to exist and no effort has been made to put the situation 
in a light that would present the transition to the new system as 
unduly easy. There are two broad classes of considerations which, 
however, should be taken into account in studying the situation 
which would exist after the adoption of the proposed bill. These are 
as follows: 

1. Many banks do not keep their permitted balances with banks 
in reserve cities, but with banks in central reserve cities. The result 
is that the total amount of drafts to be made upon reserve city banks 
will, in fact, be less than that which has already been computed and 
there will be less necessary shifting of balances under the operation 
of the bill in question. 

2. It is not true that all banks would as assumed come into the new 
system within 60 days. The act is founded upon the provision that 
(a) within 90 days after the adoption of the act the organization com¬ 
mittee shall designate places for the organization of reserve banks, 
and that (b) within 60 days after the date when the organization of a 
bank has been announced, there shall be a shift of a certain percent in 
the reserves required. This would be a total of 150 days after the pas¬ 
sage of the act which would be likely to elapse before the new reserve 
requirements would become effective. More important still, the 
new reserve banks can be organized in any district as soon as a capital 
of $5,000,000 each is assured. This would be $60,000,000 in all, so 
that even if reserve banks were simultaneously organized in all dis¬ 
tricts it would not be necessary for more than three-fifths of the banks 
to have signified an intention to enter the system. The banks are 


70 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


given a year within which to settle for themselves whether they will 
enter the system or not. It is thus entirely possible, although we think 
not probable, that the organization of some of the reserve banks 
might be deferred until several months after the adoption of the act. 
If this should be the case tiie call for new reserves would be even 
slower and it is fair to assume that the movement of banks into the 
system will practically be distributed throughout the year so that the 
draft on reserve funds will not fall suddenly as has been assumed in 
the computations made above, but will be diffused over a very con¬ 
siderable period. This would give ample opportunity for the acquir¬ 
ing of reserve money through any one of the channels through which 
it is ordinarily obtained—importation, production of gold, the gather¬ 
ing in of cash in circulation, or as a substitute the gradual extension 
of rediscounts by Federal reserve banks which count for reserve pur¬ 
poses the same as actual cash, up to the specified limit permitted by 
the act. There need therefore be no anxiety whatever with reference 
to a sudden stringency due to an excessive demand for currency con¬ 
sequent upon a rush of banks into the new system immediately after 
the enactment of the proposed legislation. On the contrary, the 
reasonable expectation would point in the opposite direction— 
toward a somewhat extensive relaxation of cash requirements due to 
the fact that banks will see a profit in getting rediscounts from the 
Federal reserve banks instead of fulfilling their reserve requirements 
by transferring actual reserve money to such banks. This is quite 
opposed, we are aware, to the current view on this subject, but it is 
far more in harmony with the facts of the case. 

SECTION 21. 

In this section provision is made for the repeal of portions of exist¬ 
ing law which require that the 5 per cent fund deposited with the 
Treasurer of the United States by national banking associations for 
the purpose of note redemption shall be counted as part of the lawful 
reserve. There is no good reason for treating the 5 per cent fund 
in this way and there never has been any. The existing requirements 
of legislation practically withdraw the amount kept with the Treasury 
for the purpose of current redemption of national bank notes from 
the actual uses of the bank and put them out of feach. It is believed 
that if the national banks are to continue to issue notes, and so long 
as they do, they should be required to provide for the redemption of 
their notes on an independent basis, and that the fiction of counting 
as reserve something which is not reserve and never can serve that 
purpose ought not to be maintained. As the national-bank notes are 
retired, through the presentation of 2 per cent bonds for conversion 
into threes, the amount of the fund kept on deposit with the Treasury 
for the current redemption of national-bank notes will be of less and 
less importance, so that such burden as is thrown upon the banks 
by the provisions of section 21 will disappear as the banks at their 
own option convert their bonds. The section is therefore a further 
working out of the ideas carried by section 20, which are in sub¬ 
stance that reserve should be either actual cash at home or a balance 
with a cooperative institution which is organized for the purpose of 
maintaining and safeguarding the solvency of the country and which 
can be relied upon to hold its balances subject to call in case of 
necessity. 


CHANGES IN THE BANKING AND CUKRENCY SYSTEM. 71 


SECTION 22. 

Section 22 establishes a reserve of 33 J per cent of the outstanding 
demand liabilities of each Federal reserve bank, such reserve to be 
held in gold or lawful money. In a general way the committee 
believes that requirement of a fixed reserve is not a wise or desirable 
thing as viewed in the light of scientific banking principle. It be¬ 
lieves, however, that in a country accustomed to fixed reserve require¬ 
ments the prescription of a minimum reserve may have a beneficial 
effect, and it therefore has determined upon 33J per cent. This it 
regards as a minimum requirement and it firmly believes that the 
reserve banks will of their own accord keep as a usual practice con¬ 
siderably more than the amount required. It will be remembered 
that in an earlier section (sec. 12) the Federal reserve board was 
given power to suspend reserve requirements for 30 days if it saw 
fit. And in the present section, with that in mind, it is provided that 
if, upon notice of 30 days after being directed by the Federal reserve 
board to make good its required reserve so as to bring it up to 33 J per 
cent, any Federal reserve bank fails to comply with directions, the 
Federal reserve board shall have power to close the bank and appoint 
a receiver therefor. 


SECTION 23. 

In section 23 it is sought to improve upon and strengthen existing 
bank examination requirements, m the belief that the latter are not 
now sufficiently effective and that existing authorities have not the 
power to carry through such examinations either with the thorough¬ 
ness or the frequency that the circumstances demand. Section 23 
therefore provides for a change in the method of compensating bank 
examiners and alters in various details the methods now employed in 
carrying out the examinations. 

In view of the close and intimate relationships which are to be 
maintained between Federal reserve banks and their member banks, 
and in view of the fact that the Federal reserve banks are authorized 
to act as clearing houses for such member banks, the power is be¬ 
stowed upon the Federal reserve banks subj ect to the oversight of the 
Federal reserve board to carry on examinations of member banks as 
it may deem best. These examinations would be similar to those 
now conducted by clearing-house associations. 

Paragraph 3 of the section authorizes the Federal reserve board to 
make an examination not less frequently than four times a year of 
national banks in reserve cities. This is in view of the fact that the 
reserve cities, if they continue to be such, will have the power of hold¬ 
ing bank funds and of conducting all of the functions they now per¬ 
form. It has been found in the past that the condition of city 
banks changed much more rapidly than did that of country banks, 
and it is therefore thought to be desirable that specially close over¬ 
sight should be maintained with regard to this class of banks. 

It has been complained that under this section national banks in 
reserve cities would be under examination nearly all the time. No 
charge of the sort can be sustained. The Federal reserve board’s 
examinations of banks in reserve cities, which are to be made four 


72 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

times a year, are not additional to the two examinations of every 
national banking association described in the first paragraph, but 
include them. In other words, banks ranked as country banks are 
to be examined at least twice and all others at least four times a year 
by the Federal reserve board, while, if desired, the reserve bank of 
each district may have a system of its own for keeping advised of the 
affairs of member banks—a plan employed by clearing-house associa¬ 
tions to-day. The specifications with reference to the items to be 
shown in the reports of examination of national banks in reserve 
cities cover items that have been, it is thought, neglected under past 
legislation. 

In general the purpose of this section is to convey all reasonable 
and necessary power of bank examination, to place it where it can be 
most effectively used, and to assume that the power is to be used for 
the purpose of strengthening, protecting, but certainly not of annoy¬ 
ing or crippling the banks to which it is applied. 

SECTION 24. 

In this section it is sought to correct a bad practice, all too preva¬ 
lent, of paying fees to bank examiners in order that they may make 
a favorable report upon the condition of a bank; and further to end 
the illegitimate practice whereby officers of national banks have here¬ 
tofore profited at the expense of borrowers by charging a commission 
or brokerage for the obtaining of loans. The extent of these prac¬ 
tices can not be stated, but that they prevail is certain; and it is 
equally clear that they are opposed to public welfare and to sound 
banking, besides being wholly at variance with fundamental principles 
of honorable personal conduct. 

SECTION 25. 

In this section it is endeavored to overcome the practice which has 
sprung up on the part of dishonest or cowardly national bank stock¬ 
holders of evading the double liability provision when they have 
been informed of the failure of a bank m which they hold shares, by 
transferring such shares to some “dummy n who is immune from 
recovery under the double-liability provision. It is believed that by 
making stockholders who have transferred their shares 60 days before 
a bank failure equally as liable as if they had not made such transfer, 
the needs of the situation will be met. Some have alleged that the 
requirements should be that stockholders be liable whenever and so 
long as it could be proven that they had knowledge of the impending 
bank failure, but that they should not be liable if in good faith they 
transferred their shares within 60 days before a failure. This sounds 
plausible but is at variance with the facts of experience. The process 
of proving that a stockholder had knowledge is difficult and expensive, 
if not impossible in many cases, and it is believed that the 60-day 
provision is entirely equitable and far more workable. 

SECTION 26. 

Loans on improved farm lands are provided for in this section under 
strict limitations as to the value of the security and the amount of 
the loan as compared with the face of the bank’s capital. The loans 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 73 

are limited to a period of twelve months, and are permitted only in the 
case of country banks. This provision has not keen made, as seems 
to be supposed in some quarters, for the purpose of furnishing a 
means of supplying farmers with working capital. It has been made 
upon the advice of practical bankers, in recognition of the fact that 
in many parts of the country the principal or almost the sole business 
of national banks is found in making loans to farmers, and that while 
these loans are in every sense commercial in that they are to be paid 
back out of the proceeds of a business process then going on—the 
raising and marketing of a crop—the only actual security the farmer 
can offer is a lien upon his land and its products. To allow the bank 
to take this lien enables it to do frankly and truthfully, with due pro¬ 
tection to itself, business that it will probably do in some way, even if 
not thus authorized, inasmuch as the well-being of the community 
and the transaction of its business calls for the extension of loans to 
farmers who are engaged in the process of growing and marketing 
consumable articles and who need working capital in order to facilitate 
their operations. The total amount of such loans which could be 
made under the provisions of this section might run as high as 
$150,000,000, but is not likely to approximate that sum. 

section 27. 

Permission to national banks to open departments specifically 
designed for the reception of savings deposits and conducted with a 
view to the separate investment and protection of such savings 
deposits is granted in section 27. For a long time national banks 
have found their business encroached upon by the growth of savings 
banks and trust companies, and in several hundred instances they are 
now found evading the law by the organization of allied concerns 
which are carried on as trust companies or savings banks under 
technically separate organization, but really under an identical 
control. The committee, while strongly believing in the principle of 
a corps of commercial closely restricted banks as the basic element in 
the country’s credit system, believes that with the added strength 
afforded by the new Federal reserve banks, Congress may reasonably 
relax some of the restrictions now surrounding the business of national 
banks and allow to national institutions the savings bank and limited 
trustee functions recognized in this section without unduly straining 
the essential structure of the national banking system, provided that 
savings departments if organized shall be conducted upon an entirely 
separate basis from the commercial departments of the national 
banks creating them, with segregated reserves and strictly segregated 
assets. Some further restrictions have been laid down in the section 
which are largely self-explanatory. 

SECTION 28. 

There has long been a demand for an extension of the powers of 
national banks which would permit them to facilitate foreign trade 
and do business abroad. The plan upon which the committee has 
determined after much consideration and comparison of various 
competing propositions calls for permission to national banks having 


74 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

a capital of $1,000,000 or over to establish branch banks in foreign 
countries whenever they may deem best, subject to regulations to be 
prescribed by the Federal reserve board. It is, however, required 
that due application shall be made to the reserve board for permis¬ 
sion to establish such branches and that in establishing them the 
bank in question shall set aside a specified amount of its capital for 
use at the said branches and shall submit to suitable examination of 
the affairs of the branches. A separate accounting system is ordered 
to be maintained at each branch in order that it may be known 
exactly how successfully each such independent institution is being 
carried on, and in order to prevent unsuccessful operations engaged 
in at one point from being covered up in the affairs of the institution 
as a whole. Inasmuch as the requirements concerning the creation 
of these branches are necessarily general in terms, section 28 natu¬ 
rally specifies that a power of further regulation from the adminis¬ 
trative standpoint shall be lodged with the Federal reserve board 
in order that the said board may exercise a suitable control over the 
doings of the banks which apply for such permission, and of their 
branches. 

SECTION 29. 

Section 29 is merely the usual provision for repeal of inconsistent 
statutory requirements, whatever they may be, that might conflict 
with the terms of the legislation now proposed for adoption. 

SECTION 30. 

Section 30 specifies that Congress retains the right to amend, alter, 
or repeal the act—a power reserved, no doubt, in any event, but 
which it has been deemed best to express in specific language. 


Appendix A 


Daily statement of the United States Treasury at close of business Aug. 5, 1913. 

CASH ASSETS AND LIABILITIES. 

General fund. 


ASSETS. 


Cash: 

In Treasury offices— 

Gold coin. 

Gold certificates. 

Standard silver dollars.... 

Silver certificates. 

United States notes. 

Treasury notes of 1890. 

Certified checks on banks.. 

National-bank notes. 

Note. — This includes 
§44,468,406.97 which the 
Treasury has redeemed and 
for which it will receive 
payment from national 
banks. 


§26,227,243.44 
91.276.790.00 
8,565,931.00 
14,136.624.00 
7,944.142.00 
4,538.00 
524,892.95 
48,810,159.97 


LIABILITIES. 

Current liabilities: 

In Treasury offices— 

Disbursing officers’ bal¬ 
ances .*. §69,432,075.81 

Outstanding warrants. 3,754,564.40 

Outstanding Tresurer’s 

checks. 9,440,773.90 

Post Office Department 

balances. 10,135,920.79 

Postal savings balances_ 1,504,100.63 

Judicial officers’ balances, 

etc. 8,394,014.25 

National-bank notes: Re¬ 
demption fund 1 . 20,741,483.50 

National-bank 5 per cent 

fund. 26,871,679.38 

Assets of failed national 

banks. 5,441,625.28 

Coupons and interest checks 1,499,769.47 
Miscellaneous (exchanges, 
etc.). 5,075,981.15 


Total. 162,291,988.56 

Subtract: Checks not 

cleared. 17,944,501.58 


197,490,321.36 

In national-bank depositaries— 

To credit of Treasurer 

United States. 54,574,542.20 

To credit of postmasters, 
judicial officers, etc. 6,525,838.30 


144,347,486.98 

In national-bank depositaries— 

Judicial officers’ balances, 


etc. 6,525,838.30 

Outstanding warrants. 794,842.16 


Available cash in Treasury and 

banks. 258,590,701.86 

Free and available balance in 
Treasury and banks: 

Available cash. §258,590,701.86 
Current lia¬ 
bilities. 151,668,167.44 


Free balance... 106,922,534.42 
In treasury, Philippines— 

To credit of Treasurer, 

United States. 

To credit of disbursing 

officers. 

Balances in Treasury offices, 
limited tender or unavail¬ 
able— 

Silver bullion. 

Subsidiary silver coin. 

Fractional currency. 

Minor coin. 


Total cash assets in the 
general fund. 286,380,973. 45 


Current liabilities in Treasury and 
banks. 151,668,167.44 


In treasury, Philippines— 
Disbursing officers’ 


balances. 1,654,548.97 

Outstanding warrants. 2,105.704.09 

Total liabilities against cash... 155,428,420.50 

Net balance in general fund. 130,952,552.95 


Total liabilities and net 
balance.. 286,380,973.45 


1,829,953.69 
1,654,548.97 


2,185,039.91 
20,148,879. 76 
339.19 
1,971,510.07 


i The act of July 14, 1890, provides that deposits made by national banks to redeem circulating notes shall 
be covered into the Treasury as miscellaneous receipts and that the Treasury shall redeem from the general 
cash the circulating notes which come into its possession subject to redemption. 


75 




















































76 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


The currency trust funds, the general fund, and the gold reserve fund. 


ASSET 5. 

LIABILITIES. 

Currency trust funds: 

Gold coin. $890,041,529.00 

Gold bullion. 202,778,640.00 

Outstanding certificates: 

Gold certificates outstanding. $1,092,820,169.00 
Silver certificates outstand¬ 
ing. 485,008,000.00 

Total gold. 1,092,820,169.00 

Silver dollars. 485,008,000.00 

Silver dollars of 1890. 2,645,000.00 

Treasury notes outstanding . 2,645,000.00 

Total currency trust funds_ 1,580,473,169.00 

General fund: 

Total cash assets, as above.. 286,380,973.45 

Total outstanding certificates 1,580,473,169.00 
General fund liabilities and 
balance* 

Total liabilities, as above_ 155,428,420.50 

Balance in 
general 
fund, as 

Gold reserve fund: 

Gold coin . 100,000,000.00 

Gold bullion. 50,000,000.00 

above.$130,952,552.95 

Gold reserve 1 ... 150,000,000.00 

Total net bal¬ 
ances . 280,952,552.95 

Grand total cash assets in 

Treasury. 2,016,854,142.45 

2,016,854,142. 45 


i Reserved against $316,081,016 of United States notes and $2,641,000 of Treasury notes of 1890. 

Cash receipts and payments, Aug. 5, 1913. 

GENERAL FUND. 


RECEIPTS. 

PAYMENTS. 

Current receipts: 

Customs. $1,321,619.83 

Internal revenue— 

Ordinary. 879,369.21 

Corporation tax. 3,284.53 

Miscellaneous. 82,682.90 

Currency payments: 

By Treasury and Subtreasuries.. $2,693,228.31 
By national banks. 3,827,706.54 

Total. 2,286,956.47 

Agency receipts: 

National-bank redemptions, post¬ 
masters’ receipts, etc. 5,506,450.65 

Total. 6,520,934.85 

Agency payments: 

National-bank redemptions, post¬ 
masters’ payments, etc. 3,259,302.77 

Total current and agency re¬ 
ceipts. 7,793,407.12 

Public-debt receipts: 

Lawful money deposited to re¬ 
tire national-bank notes (act 

July 14, 1890). 104,650.00 

Total current and agency pay¬ 
ments .. 9,780,237.62 

Public-debt payments: 

Lawful money paid for national- 
bank notes retired (act July 14, 

1890)...... 125,250.00 

United States bonds, certificates, 

Proceeds of postal savings bonds. 

Panama Canal- 

Proceeds of bonds. 

and notes paid. 

Panama Canal payments: 

Disbursements for the canal (in¬ 
cluded above in current pay¬ 
ments) . 

Total receipts for the day. 7,898,057.12 

Excess of payments for the day. 2,007,430.50 

Total payments for the day_ 9,905,487.62 

Excess of receipts for the day. 

9,905,487. 62 

. 9,905,487.62 


Note.— Both receipts and payments represent transactions which have reached the Treasury this day. 
Distant points are, necessarily, a number of days behind. 


RECAPITULATION, GENERAL FUND. 

TRANSACTIONS IN NATIONAL-BANK NOTES. 

Total cash assets in the general 

fund, previous day. $288,388,403.95 

Receipts this day. 7,898,057.12 

Notes received for redemption this 
day. $1,241,900.80 

Month to date: 

296,286,461.07 

Payments this day. 9,905,487.62 

This fiscal year. 8,550,875.70 

Last fiscal year. 9,836,666.60 

Year to date: 

Total cash assets in the general 
fund at end of this day. 286,380,973. 45 

This fiscal year. 69,801,606.20 

Last fiscal year. 69,503,127.50 







































































CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


77 


Bonds held in trust for national banks, Aug. 5, 1913. 


Kind of bonds. 


Rate of 
inter¬ 
est. 


Total amount 
outstanding. 


Bonds held for national banks. 


Total. 


To secure 
circulation. 


To secure deposits of 
public moneys. 


Value at 
par. 


Value at 
rate ap¬ 
proved by 
depart¬ 
ment. 


II. 


Ill, 


GOVERNMENT. 

U. S. loan of 1925..at par.. 

U. S. loan of 1908-1918.do.. 

U. S. Panama of 1961.. .do.. 

U.S.consol of 1930.do.. 

U.S.Panama of 1936.. .do.. 

U.S.Panama of 1938...do.. 

Philippine loans.do.. 

Porto Rico loans.do.. 

District of Columbia..do.. 

Territory of Hawaii, 34 per 
cent bonds at 90 per cent 
of par; all other Hawaiian 
bonds at market value, 
not exceeding par. 


65 


MISCELLANEOUS. 

Philippine Railway Co_ 

Manila Railroad Co. 

At 90 per cent of market 
value, not exceeding 90 
per cent par. 

IV. State, county, and city at 
75 per cent 1 2 of market 
value, not exceeding par. 


0 ) 


0) 


1118,489,900 
63,945,460 
50,000.000 
046,250,150 
54,631,980 
30,000, 000 
16,000,000 
5, 225,000 
6,970,650 


6,515,000 


8,543,000 
6,735,000 


$36,821,700 
25,663,300 
17,580, 700 
616,225,750 
54,128,360 
29,472, 640 
5,927,000 
1,801,000 
933,000 


1,943,000 


898,000 

10,000 


14,831, 600 


$33, 357, 500 
22,023 200 


604, 591, 5.50 
52, 8.54, 360 
28,945,640 


$3,464, 200 
3,640,100 
17,580,700 
11,634,200 
1,274,000 
527,000 
5,927,000 
1,801,000 
933,000 


1,943,000 


898,000 

10,000 


14,831,600 


$3,464, 200 
3,640,100 
17,580, 700 
11,634, 200 
1,274,000 
527,000 
5,927,000 
1,801,000 
933,000 


1,895,900 


588,571 
6.750 


9,693,102 


Total. 


806, 236,050 


741, 772, 250 


64, 463,800 


58, 965, 523 


1 Various. 

2 For the District of Columbia temporary tax deposits, certain other classes ol securities are also accept¬ 
able at this rate and State bonds are acceptable at 85 per cent of market value, not exceeding par. 

When banks have occasion to withdraw bonds held by the Treasurer to secure deposits of public moneys, 
the following shall be the order of withdrawal: Group IV, Group III, Group II, and Group I. 

Bonds within a group may be interchanged by banks if desired, but bonds in a lower group may not be 
substituted for those in a higher group, except that an initial substitution of bonds of a lower group for 
those of a higher group may be made to an amount not to exceed 30 per cent of the total security value 
of bonds held for a particular bank. National bank depositaries which have not as yet taken out the full 
amount of circulation authorized by law may withdraw United States 2’s and substitute for them bonds 
in Group II, provided the 2’s as withdrawn shall be used as security for additional circulation. 

































78 CHANGES IN THE BANKING AND CURRENCY SYSTEM 


Current receipts contrasted with pay warrants drawn (exclusive of postal service payable 

from postal revenues) — Aug. 5, 1913. 



Month to date. 

Year to date. 

* 

This fiscal year. 

Last fiscal year. 

This fiscal year. 

Last fiscal year. 

Current receipt: 

Customs . 

$3,845,597. 68 

3,610,306.62 
44,124.16 

$3,859,556. 50 

$31,652,252. 22 

$31,996,058. 77 

Internal revenue— 

Ordinary . 

3,635,497.81 
86,112. 59 

29,337,154. 75 

28,368,034.10 

Onrpnra.tinn tax _. 

1,897,423.04 

1,440,105.21 

Miscellaneous . 

895,970.32 

677,412.55 

5,746,692.89 

5,990,714.87 


Total cash receipts. 

8,401,998. 78 

8,258,579. 45 

68,633,522.90 

67,794.912.95 


Pay warrants drawn: 

Legislative establishment. 

102,627.35 
468. 97 

130,904.06 
9,000. 00 

1,343,143.83 
46,186. 66 

1,214,593.19 

Executive Office. 

68,355.00 

State Department. 

24,123. 44 

35,617. 48 

109,753.09 
55,431.12 

1,014,557. 46 

588,885. 90 

382,498. 58 

Treasury Department- 

Excluding public buildings.... 
Public buildings 1 . 

61,422.60 

221,245.01 

1,907,407.11 

4,316,767.05 
1,921,198. 23 

16,776,280.11 

3,832.832.69 

1,700,813.68 

War Department- 

Military . 

12,199,639.90 

Civilian . ..... 

230,088.02 

184,814. 53 

Rivers and harbors. 

346,063.75 
29,616. 04 

132,406. 49 

426,436.85 
31,588. 99 

25,347. 94 

4,975,390.48 
1,380,599. 44 

4,026,133. 75 

Department of Justice. 

596, 761.37 

Post Office Department— 

Not including postal service.... 
Postal deficiencies . 

326,780. 40 

165,422.37 
401,947.60 

Navy Department,—Naval. 

1,988,566. 71 
14,900.00 

120,432.03 
3,225, 894.38 
530, 760.23 
1,997.07 
48,625. 62 

1, 798,159.50 
7,233.86 

380,588. 49 

3,005,264.59 
197,125.88 
21,506.00 

| 3,745.10 

14,311,720.37 
87, 208. 33 

4,834,369.19 
17,674, 638. 28 

1, 537, 434. 72 

2,800,966. 54 

12, 688,142. 26 

Civilian. 

75, 837.12 

Interior Department—E x c 1 u d - 
ing “Pen¬ 
sions ” 
and “In¬ 
dians”.... 

Pensions.... 

Indians. 

Department of Agriculture. 

4,877,134.34 
15,774, 255.46 
1,020,043.64 
1,972,362.62 

| 1,061,585.91 

Department of Commerce. 

/ 937,162.08 

Department of Labor. 

{ 349, 816.37 

383,986. 95 

Independent offices and commis¬ 
sions. 

69,017.12 

583.33 

339, 331.19 

District of Columbia. 

61,639.01 
111, 194. 75 

577,333.33 
77,705.67 

2,574,110.30 
3,332, 241.54 

2, 807, 444.19 

Interest on the public debt. 

3,406.007.40 


Total pay warrants drawn.... 
Less unexpended balances 
repaid. 

8,998,407.68 

405,595.70 

7,907,882.74 

444, 805. 69 

80,788,974. 79 

2,281,956.65 

68,795,956.79 

1,061.662.55 


Total pay warrants (net). 

8,592, 811.98 

7,463,077.05 

78, 507,018.14 

67,734, 294.24 

Excess of current receipts ('surplus'). 


795,502.40 


60, 618.71 

Excess of pay warrants (deficit).... 

190, 813.20 

9,873,495. 24 



Public debt receipts: 

Lawful money deposited to retire 
national-bank notes (act July 14, 
1890). 

334,650.00 

50,060.00 

• 

1, 791, 690.00 
1,116,880.00 

1,502,060.00 
854, 860.00 

Proceeds of postal savings bonds_ 

Proceeds of Panama Canal bonds... 








Total public debt receipts.... 

334,650.00 

50,060.00 

2,908, 570.00 

2,356, 920.00 

Public debt payments: 

National-bank notes retired. 

383,900.00 

375,950.00 

3,143,012.50 

5,280.00 

3,256,038. 00 

29,765.00 

United States bonds, certificates, 
and notes paid. 




Total retirements. 

383,900. 00 

1,049,846.50 

375,950. 00 

3,148,292.50 

4,263,207.65 

3,285,803.00 

4,185,587.45 

Panama Canal payments: 

Pay warrants for construction, etc.. 

28,073.06 

Total public debt and Panama 
Canal pay warrants. 

1,433,746.50 

404,023.06 

7,411,500.15 

7,471,390. 45 


Excess of public debt receipts. 





Excess of public debt and Panama 
Canal pay warrants... 

1,099,096.50 

353,963.06 

4,502,930.15 

5,114,470. 45 


Net excess of all receipts. 


441,539.34 



Net excess of all pay warrants. 

1,289,909.70 

14,376,425.39 

5,053,851.74 




1 Sites, construction, equipment, operation, and maintenance. 










































































CHANGES IN THE BANKING AND CURRENCY SYSTEM. 79 

Panama Canal (Aug. 5,1913): 

Total amount expended on purchase and construction of canal to this date.$322,491,900.66 

Amount expended to this date from proceeds of sales of bonds, including premiums.. 138,600,869.02 

Balance expended out of general fund of Treasury, reimbursable from proceeds of 
bonds not yet sold. 183,891,031.64 

Total bonds authorized by existing laws for Panama Canal. 375,200,980.00 

Total bonds issued to this date.,. 134,631,980.00 

Balance of bonds authorized but not yet issued. 240,569,000.00 











Abstract of reports of condition of national banks in the United States on Sept. 4 and Nov. 26, 1912, and Feb. 4, Apr. 4, and June 4, 1913. 


80 


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81 


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82 


CHANGES IN THE BANKING AND CURRENCY SYSTEM 


Changes in the principal items of resources and liabilities of national banks as shown by the 
returns on June 4, 1913, as compared with the returns on Apr. 4, 1913, and June 14, 
1912. 


Since Apr. 4, 1913. 


Since June 14, 1912. 


Items. 


Increase. 


Decrease. 


Increase. 


Loans and discounts. 

United States bonds. 

Due from national banks, State banks 

and bankers, and reserve agents. 

Specie. 

Legal tenders. 

Capital stock. 

Surplus and other profits. 

Circulation. 

Due to national and State banks and 


$2,705,190.00 


11,168,227.82 
14,530,677.00 
4,654,210.47 
13,686,712. 07 
3,148,340. 00 


535,068,246.39 


$189,123,701.09 
12,584,390.00 


58,245,697.88 


1,467,806.00 
23,349,117.00 
37,920,240. 46 
13,434,431.00 


Decrease. 


$27,903,419.00 
32,688,060.36 


bankers. 

Individual deposits. 

United States Government deposits 

Postal savings deposits. 

Bills payable and rediscounts. 

Total resources. 


3,522,162.56 
974,232.31 
16,374,236. 73 


71,793,967. 75 
15,325,493.92 


128,000,377.76 


57,611,846.42 
1 9,220,94 i." 53 


45,054,576. 42 


14,300,470. 73 
175,155,879.89 


1 Postal savings deposits eliminated from United States deposits. 

Total number banks reporting June 14, 1912, 7,372; June 4, 1913, 7,473; increase, 101. 

Thomas P. Kane, 

Acting Comptroller. 













































Abstract of reports of the national banking associations of the United States, showing their condition at the close of business on Wednesday, June 4, 

1913. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 83 














































































Abstract of reports of the national banking associations of the United States , showing their condition at the close of business on Wednesday, June 4, 

1913 —Continued. 


84 


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19 IS —Continued. 


88 


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Abstract of reports of the national banking associations of the United States , showing their condit ion at the close of business on Wednesday , June 4, 

1913 —Continued. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM 







































































Abstract of reports of the national banking associations of the United States , showing their condition at the close of business on Wednesday , June 4, 

1913 —Contim ed. 


90 


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Abstract of reports of the national banking associations of the United States , showing their condition at the close of business on Wednesday, June 4, 

1913 —Contini ed. 


92 


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1913 —Continued. 


94 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 



>0110 report for Apr. 4, 1913. 



















































































Abstract of reports of the national banking associations of the United States, showing their condition at the close of business on Wednesday, June 4, 

1913 —Continued. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 95 

























































































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8829°—H. Rept. 69, 63-1-7 


1 One report for Apr. 4,1913. 2 Includes $21,947 State bank notes outstanding. 























































































































Abstract of reports of the national banking associations of the United States, showing their condition at the close of business on Wednesday, June 4, 

1913 —Continued. 


98 


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1913 —Con tin' ed. 


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Specie and circulation of national banks on June 4 , 1913. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


101 


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Specie and circulation of national banks on June 4, 1913 —Continued. 


102 CHANGES IN THE BANKING AND CUBBENCY SYSTEM. 


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CHANGES IN THE BANKING AND CUBBENCY SYSTEM 


4,326,437.50 

243,650.00 

117,591,956.50 

14,661,825.00 

8,911,685.00 

6,890,345.00 

4.928.287.50 

11,075,722.50 

6,010,075.00 

8.197.197.50 

3,066,387.50 

2,549,640.00 

22.855.597.50 

2,969,980.00 

11.613.272.50 

10.692.447.50 

oe 

29,452,120.00 

19,406,002.50 

26.819.122.50 

8,501,085.00 

9,031,250.00 

8.913.922.50 

15.197.182.50 

5.783.547.50 

123,104,232.50 

3,952,715.00 

3,266,010.00 

8.593.212.50 

8.838.642.50 

3,185,620.00 

1,515,145.00 

4.954.902.50 

1,657,480.00 

8.217.187.50 

44,180,915.00 

2,506,205.00 

3,388,790.00 

16,627,430.00 

2,740,910.00 

914,542. 50 

1,557,540.00 

73,302.50 

6,350.00 

2,105,203.50 

176,425.00 
101,715.00 
13,755.00 

40.962.50 

77.277.50 
24,925.00 

282.852.50 

18.912.50 
21,610.00 

190.812.50 

14,530.00 

86,077.50 

90.552.50 

1,140,407.50 

344,060.00 

188,917.50 

262,017.50 

108,665.00 

93,720.00 

74.337.50 

111,017.50 

60.762.50 

1,243,497.50 

19,055.00 

17,290.00 

46.547.50 

61,097.50 

120,830.00 

22,405.00 

46.107.50 

21,520.00 

120,842.50 

475,695.00 

78,645.00 

128,670.00 

313,870.00 

31,590.00 

8,707.50 

21,460.00 

4,399,740 

250,000 

119,697,160 

14,838,250 

9,013,400 

6,904,100 

4.969.250 
11,153,000 

6,035,000 

8,480,050 

3,085,300 

2.571.250 
23,046,410 

2,984,510 

11,699,350 

10,783,000 

115,562,870 

29,796,180 

19,594,920 

27,081,140 

8,609,750 

9,124,970 

8,988,260 

15,308,200 

5,844,310 

124,347,730 

3,971,770 

3,283,300 

8,639,760 

8,899,740 

3,306,450 

1,537,550 

5,001,010 

1,679,000 

8,338,030 

44,656,610 

2,584,850 

3,517,460 

16,941,300 

2,772,500 

923,250 

1,579,000 

1,822,971.08 
74,710*00 

56,850,501.33 

4,336,892.86 
3,254,723.37 
1,444,257.36 
818,543.95 
2,433,230.70 
2,008,966.84 
2,840,797.90 
851,332.90 
1,038,305.50 
8,167,572.69 
1,138,083.40 
2,664,819.55 
3,881,762.25 

34,879,289.27 

11,855,381.70 
8,015,040.07 
12,699,435. 76 

5.204.449.85 

4.972.972.85 
5,831,883.38 
6,382,245.20 
1,673,079.04 

56,634,487.85 

1,795,198.05 

1.971.587.85 

3,318,115.30 

3,945,511.70 

3,183,374.62 

966,903.18 

2,821,813.40 

1,029,974.65 

3.350.215.85 

22,382,694.60 

2,168,610.55 

2,758,554.78 

9,915,420.76 

1,560,811.60 

514,134.35 

614,037.40 

122,600.14 
1,350.00 

3,073,721.56 

330,131.91 

170,130.98 

135,550.01 

200.475.45 
377,465.77 
205,024.51 
237,073.69 

64,883.55 

129,468.35 

846.242.46 
120,395.40 
130,230. 70 
230,420. 75 

3,177,493.53 

547,974.43 

350.656.57 
675,454.40 
218,237.51 
226,129.60 

300.635.58 
310,769.13 
120,001.74 

2,749,858.96 

166,879.35 
112,751.75 
169,762.50 
224,490.95 

164,669.22 

49,588.38 

120,800.65 

54,153.15 

321,453.74 

1,384,549.69 

144,313.55 

149,127.12 

603,834.26 

100,662.10 

28,849.85 

26,622.90 

24,794 412,180 

490 8,360 

1,260,274 13,211,841 

771,309 
601,619 
329,766 
160,726 
630,101 
369,093 
516,008 
93,089 
156,964 
993,495 
138,320 
326,952 
781,846 

5,869,288 

1,565,631 
1,235,694 
1,805,090 
625,459 
495,961 
593,709 
609,966 
195,512 

7,127,022 

rH(NCMX05HCMO^ 

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1,907,919 

46,320 

31,882 

181,917 

49,725 

15,655 

3,654 

JOC^HOfCOOCOONHiOH 

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oo'to'r^'coVH' ^cTco'oo' 
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1,412,647 

124,964 
102,694 
423,346 
69,647 

23,297 

15,983 


710,000 

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• • • • i « i • • • • 

54,000 

206,000 

. 

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206,000 



• • © © • • 

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1,375,000 

• • • • • • *oo • © © © 

• 00000 * 05 lO * CM Tt 1 

650,000 

635,000 
80,000 
885,000 
50,000 
770,000 
340,000 
525,000 
60,000 

3,345,000 

40,000 

275,000 

60,000 

80,000 

455,000 

ilNj 

746,970 

55,550 

19,591,240 

1,626,600 
1,020,030 
409,080 
157,020 
634,350 
617,290 
1,096,730 
376,840 
347,620 
3,040,440 
337,420 
818,650 
1,432,190 

11,914,260 

3,786,100 
2,708,510 
4,179,520 
1,715,800 
1,289,620 
1,274,280 
1,948,000 
364,260 

17,266,090 

682,550 
742,850 
939,230 
1,219,310 
1,197,500 
343,010 
922,990 
400,860 
1,325,100 

7,773,400 

285,610 

216,500 

870,890 

271,560 

20,770 

111,550 

486,426. 94 
8,960.00 

17,628,424.77 

1,400,936.95 
1,343,031.39 
439, 730. 35 
220,952.50 
517,790.93 
597,453.33 
685,841.21 
155,587.35 
237,613.15 
2,397,048.23 
409,387.00 
799,721.85 
1,067,004.50 

10,272,098.74 

4,469,350.27 
3,194,143.50 
4,592,180.36 
2,393,066.34 
1,980,427.25 
3,035,899.80 
2,597,026.07 
783,279.30 

23,045,372.89 

628,059.70 

785.264.10 
1,486,472.80 

1.715.635.75 
1,603,351. 40 

473,793.80 

1.435.879.75 
427,062.50 

893.659.11 

9,449,178.91 

1,567,403.00 
2,258,351.66 
7,645,433.50 

919.717.50 

425.562.50 

456.227.50 

89 

1 

1,526 

WCOfOOOOWNMfOHOJON 

1,457 

t^OiOOCO^rHlCi-H 
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1,971 

^©CMOtOCOH^H 
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1,238 

00 tO ^ H 

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Maryland. 

District of Columbia... 

Eastern States. 

Virginia. 

West Virginia. 

North Carolina. 

South Carolina. 

Georgia. 

Florida. 

Alabama. 

Mississippi. 

Louisiana. 

Texas. 

Arkansas. 

Kentucky. 

Tennessee. 

Southern States. 

Ohio. 

Indiana. 

Illinois. 

Michigan. 

Wisconsin. 

Minnesota. 

Iowa. 

Missouri. 

Middle States. 

North Dakota. 

South Dakota. 

Nebraska. 

Kansas. 

Montana. 

Wyoming. 

Colorado. 

New Mexico. 

Oklahoma. 

Western States. 

Washington. 

Oregon. 

California. 

Idaho. 

Utah. 

Nevada. 










































































































Specie and circulation of national banks on June 4, 1913 —Continued. 


104 


CHANGES IN The BANKING AND CURRENCY SYSTEM. 


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CHANGES IN THE BANKING AND CURRENCY SYSTEM, 105 


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Deposits and reserve of national banks on June 4, 1913 — Continued. 


106 changes in the banking and currency system. 


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Deposits and reserve of national banks on June 4, 1913 —Continued. 


108 


CHANGES IN THE BANKING AND CURRENCY SiSiEM. 




















































































































CHANGES IN THE BANKING AND CURRENCY SYSTEM. 109 


Abstract of the reports of condition of national banks in the United States on June 4, 1913, 

arranged by classes. 


RESOURCES. 

Loans and discounts. 

Overdrafts. 

United States bonds to secure 

circulation. 

United States bonds to secure 

United States deposits. 

Other bonds to secure United 

States deposits. 

United States bonds on hand... 
Premiums on United States 

bonds. 

Bonds, securities, etc. 

Banking house, furniture and 

fixtures. 

Other real estate owned. 

Due from national banks (not 

reserve agents). 

Due from State banks and 
bankers, trust companies, etc. 
Due from approved reserve 

agents. 

Checks and other cash items.... 
Exchanges for clearing house... 
Bills of other national banks... 
Fractional currency, nickels, 

and cents. 

Specie. 

Legal-tender notes. 

Five per cent redemption fund. 
Due from Treasurer of United 
States other than 5 per cent 
fund. 

Total. 

LIABILITIES. 

Capital stock paid in. 

Surplus fund. 

Undivided profits, less ex¬ 
penses and taxes. 

National-bank notes outstand¬ 
ing. 

State-bank notes outstanding.. 
Due to national banks (not re¬ 
serve agents). 

Due to State banks and bankers 
Due to trust companies and 

savings banks. 

Due to approved reserve agents. 

Dividends unpaid. 

Individual deposits. 

United States deposits. 

Postal savings deposits. 

Deposits of United States dis¬ 
bursing officers. 

Bonds borrowed. 

Notes and bills rediscounted.... 

Bills payable... 

Reserved for taxes.I. 

Liabilities other than those 
above stated. 


Central reserve 
city banks (52). 

Other reserve 
city banks (315). 

Country banks 
(6,806). 

Total (7,173). 

$1,315,735,176.67 
356,717.17 

$1,640,317,608.33 
3,183.861.62 

$3,186,975,347.94 
15,465,573.23 

$6,143,028,132.94 
19,006,152.02 

81,355,090.00 

164,633,240.00 

489,238,540.00 

735,226,870.00 

3,670,000.00 

18,547,500.00 

24,844,190.00 

47,061,690.00 

3,066,402. 44 
1 ,000,120.00 

17,122,899.04 
1,734,800.00 

23,408,628.10 
3,603,080.00 

43,597,929.58 
6,338,000.00 

787, 774.53 
210,810,479.10 

1,990.011.55 

235,190,549.44 

4,098,850.81 
604,586,627.01 

6,876,636.89 
1,050,587,655.55 

37,931,243.04 
1,543,592.52 

65,751,006. 40 
7,769,305.11 

145,206,704.51 

22,020,050.53 

248,888,953.95 

31,332,948.16 

144,611,713.50 

194,344,454.86 

100,065,031.68 

439,021,200.04 

50,308,317.15 

91,646,988.98 

265,216.882. 89 
11.902,552.93 
73,360,235.77 
14,793,766.00 

53,034, 760.41 

496,960,111.84 
18,374,495.47 
15,970,425.19 
32,405,907.00 

194,990,066.54 

762,176,994.73 

37,092,245.76 

257,560,492.57 

51,538,808.00 

6,815,197. 36 
168,229,831.61 
4,339,135.00 

262,100. 16 
314,822.5-0.52 
90,806,059.00 
3,972,834.50 

869,677. 72 
202,072,701.98 
40,221,479.00 
8,089,744.50 

2,448,704.80 

207,179,395.27 

58,880,475.00 

23,332,306.00 

3,580,482. 68 
724,074,627.77 
189,908,013.00 
35,394,885.00 

4,751,693. 46 

3,311,012.00 

1,574,266.40 

9,636,971.86 

2,445,176,007.73 

3,062,070,278.12 

5,529,673,471.19 

11,036,919,757.04 

182,650,000.00 
164,245,000.00 

264,217,710.00 
187,736,975.77 

610,052,082.00 
368,624,816.77 

1,056,919,792.00 
720,606,792.54 

56,121,856.33 

63,689,642.05 

148,329,464.19 

268,140,962.57 

79,132,825.00 
16,516.00 

161,901,967.50 
468.00 

481,090,231.50 

5,431.00 

722,125,024.00 
22,415.00 

534,790,339.03 
205,009,999.23 

411,957,865.59 
216,121,788.43 

70,712,668.42 
107,133,116. 76 

1,017,460,873.04 

528,264,904.42 

224,695,080.64 

227,697,703.81 
31,431,888.90 

76,547,400.02 
14,453,720.86 
1,086,687.83 
3,541,950,062.40 
19,297,876.16 
11,179,381.01 

528,940,184.47 
45,885,609. 76 
1,529,195.57 
5,953,461,551.12 
43,118,218.05 
18,661,875.47 

251,028.97 

975,581,299.58 

4,529,269.11 

1,102,635.28 

191,478.77 
1,435,930,189.14 
19,291,072.78 
6,379,859.18 

487,006.83 
13,449,040.00 
65,000.00 
335,000.00 
2,591,111.73 

3,018,281.21 

19,110,361.25 

2,898,462.25 

8,274,951.60 

2,153,119.72 

3,101,533.04 

10,656,064.33 

11,117,518.11 

50,215,843.32 

2,286,412.65 

6,606,821.08 
43,215,465.58 
14,080,980.36 
58,825,794.92 
7,030,644.10 

123,000.00 

66,492.17 

1,833,160.82 

2,022,652.99 

2,445,176,007.73 

3,062,070,278.12 

5,529,673,471.19 

11,036,919,757.04 


Total 

















































110 CHANGES IN THE BANKING AND CURRENCY SYSTEM 


Number of national banks showing savings deposits and amount of savings deposit as 

shown by call of June 4, 1013. 


States. 


Maine.. 

New Hampshire.. 

Vermont.. 

Massachusetts. 

Rhode Island.. 

Connecticut. 

New England States 

New York. 

New Jersey. 

Pennsylvania. 

Delaware. 

Maryland. 

District of Columbia. 

Eastern States. 

Virginia. 

West Virginia. 

North Carolina. 

South Carolina. 

Georgia. 

Florida. 

Alabama. 

Mississippi. 

Louisiana. 

Texas... 

Arkansas. 

Kentucky. 

Tennessee. 

Southern States. 


Ohio. 

Indiana. 

Illinois. 

Michigan. 

Wisconsin. 

Minnesota. 

Iowa. 

Missouri. 

Middle States. ... 

North Dakota. 

South Dakota. 

Nebraska. 

Kansas. 

Montana. 

Wyoming. 

Colorado. 

New Mexico. 

Oklahoma. 

Western States.. 

Washington.. 

Oregon. 

California. 

Idaho. 

Utah. 

Nevad . 

Arizona. 

Alaska. 

Pacific States.. 

Island possessions (Hawaii) 

United States.. 


Total 
number 
of banks. 

Number 

showing 

savings 

deposits. 

Amount of sav¬ 
ings deposits. 

69 

43 

•524,120, 447.31 

56 

15 

1,925,537.66 

49 

31 

9,011,843.60 

180 

35 

15,910,306.46 

20 

5 

5,220,718.71 

79 

14 

3,497,610.78 

453 

143 

59,686,464.52 

474 

240 

84,851,995.17 

200 

152 

60,029,284. 94 

836 

624 

201,406, 779. 21 

26 

15 

2,055,525. 60 

105 

80 

22,090,404. 98 

12 

4 

1,398,971.49 

1,653 

1,115 

371,832,961.39 

133 

90 

28,653,611.43 

116 

70 

9,756,259.37 

73 

42 

5,637, 634.71 

48 

39 

8,844,239.58 

118 

48 

8,729,484.06 

52 

42 

11,141,955.83 

87 

41 

7,860,936.63 

33 

11 

1,252,132.90 

31 

15 

1,978,255.16 

514 

62 

8,728, 699.08 

49 

15 

981,235.96 

144 

27 

4,156,304. 70 

107 

41 

9,144,145. 65 

1,505 

543 

106,864,895.06 

380 

167 

42,656,146.38 

254 

71 

9,617,374.55 

457 

240 

844,713,556. 04 

99 

88 

45,215,105. 75 

129 

110 

35,418,313.93 

271 

154 

18,877,599.59 

340 

132 

10,403,195.75 

133 

30 

3,428,705.39 

2,063 

992 

210,329,997.38 

144 

47 

1,149,111.28 

103 

50 

1,457,928.30 

242 

47 

3,891,978.05 

213 

54 

1,905,777.18 

57 

21 

1,924,229.75 

30 

12 

557,548. 42 

126 

39 

8,008.174.28 

40 

8 

207,661.67 

325 

57 

1,373,050. 27 

1,280 

335 

20,475,459. 20 

77 

59 

17,159,427.25 

83 

35 

3,716,939.06 

252 

106 

23,051,411.53 

54 

30 

1,395,799.92 

23 

17 

3,460,969.16 

11 

4 

614,240.56 

13 

2 

44,762. 47 

2 

1 

81,674.33 

515 

254 

49,525,224.28 

4 

3 

354,964.73 

7,473 

3,385 

829,070,166.56 
























































































CHANGES IN THE BANKING AND CURRENCY SYSTEM. Ill 

APPENDIX C. 

The bill as reported to the House is as follows: 

P rov ide for the establishment of Federal reserve banks, to furnish an elastic currency, to 
afford means of rediscounting commercial paper, to establish a more effective supervision of banking 
m the United States, and for other purposes. 

Be it enacted by the Senate and House of Representatives of the United 
States of America in Congress assembled, That the short title of this 
act shall be the “ Federal reserve act.” 

FEDERAL RESERVE DISTRICTS. 

Sec. 2. That within ninety days after the passage of this act, or 
as soon thereafter as practicable, the Secretary of the Treasury, the 
Secretary of Agriculture, and the Comptroller of the Currency, 
acting as “The Reserve Bank Organization Committee,” shall 
designate from among the reserve and central reserve cities now 
authorized by law a number of such cities to be known as Federal 
reserve cities, and shall divide the continental United States into 
districts, each district to contain one of such Federal reserve cities: 
Provided, That the districts shall be apportioned with due regard 
to the convenience and customary course of business of the com¬ 
munity and shall not necessarily coincide with the area of such 
State or States as may be wholly or in part included in any given 
district. The districts thus created may be readjusted and new 
districts may from time to time be created by the Federal reserve 
board hereinafter established, acting upon a joint application made 
by not less than ten member banks desiring to be organized into a 
new district. The districts thus constituted shall be known as 
Federal reserve districts and shall be designated by number accord¬ 
ing to the pleasure of the organization committee, and no Federal 
reserve district shall be abolished, nor the location of a Federal 
reserve bank changed, except upon the application of three-fourths 
of the member banks of such district. 

The organization committee shall, in accordance with regulations 
to be established by itself, proceed to organize in each of the reserve 
cities designated as hereinbefore specified a Federal reserve bank. 
Each such Federal reserve bank shall include in its title the name 
of the city in which it is situated, as “Federal Reserve Bank of Chi¬ 
cago,” and so forth. The total number of reserve cities designated 
by the organization committee shall be not less than twelve, and 
the organization committee shall be authorized to employ counsel 
and expert aid, to take testimony, to send for persons and papers, 
to administer oaths, and to make such investigations as may be 
deemed necessary by the said committee for the purpose of deter¬ 
mining the reserve cities to be designated and organizing the reserve 
districts hereinbefore provided. 

Every national bank located within a given district shall be 
required to subscribe to the capital stock of the Federal reserve bank 
of that district a sum equal to twenty per centum of the capital stock 
of such national bank, fully paid in and unimpaired, one-fourth of 
such subscription to be paid in cash and one-fourth within sixty days 
after said subscription is made. The remainder of the subscription 
or any part thereof shall become a liability of the member bank, 
subject to call and payment thereof whenever necessary to meet the 


112 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

obligations of the Federal reserve bank, under such terms and in 
accordance with such regulations as the board of directors of said 
Federal reserve bank may prescribe: Provided , That no Federal 
reserve bank shall commence business with a paid-up and unim¬ 
paired capital less in amount than $5,000,000. The organization 
committee shall have power to appoint such assistants and incur 
such expenses in carrying out the provisions of this act as it shall 
deem necessary, and such expenses shall be payable by the Treasurer 
of the United States upon voucher approved by the Secretary of the 
Treasury, and the sum of $100,000, or so much thereof as may be 
necessary, is hereby appropriated, out of any moneys in the Treasury 
not otherwise appropriated, for the payment of such expenses. 

STOCK ISSUES. 

Sec. 3. That the capital stock of each Federal reserve bank shall 
be divided into shares of $100 each. The outstanding capital stock 
shall be increased from time to time as member banks increase their 
capital stock or as additional banks become subscribers, and shall be 
decreased as member banks reduce their capital stock or cease to be 
members. Each Federal reserve bank may establish branch offices 
under regulations of the Federal reserve board at points within the 
Federal reserve district in which it is located: Provided , That the 
total number of such branches shall not exceed one for each $500,000 
of the capital stock of said Federal reserve bank. 

FEDERAL RESERVE BANKS. 

Sec. 4. The national banks in each Federal reserve district uniting 
to form the Federal reserve bank therein, hereinbefore provided for, 
shall under their seals make an organization certificate, which shall 
specifically state the name of such Federal reserve bank so organized, 
the territorial extent of the district over which the operations of said 
Federal reserve bank are to be carried on, the city and State in 
which said bank is to be located, the amount of capital stock and the 
number of shares into which the same is divided, the names and places 
of doing business of each of the makers of said certificates and the 
number of shares held by each of them, and the fact that the certifi¬ 
cate is made to enable such banks to avail themselves of the advan¬ 
tages of this act. The said organization certificate shall be acknowl¬ 
edged before a judge of some court of record or notary public; and 
shall be, together with the acknowledgment thereof, authenticated 
by the seal of such court, or notary, transmitted to the Comptroller 
of the Currency, who shall file, record, and carefully preserve the 
same in his office. Upon the filing of such certificate with the Comp¬ 
troller of the Currency as aforesaid, the said Federal reserve bank 
so formed shall become a body corporate, and as such, and in the 
name designated in such organization certificate, shall have power 
to perform all these acts and to enjoy all those privileges and to 
exercise all those powers described in section fifty-one hundred and 
thirty-six, Revised Statutes, save in so far as the same shall be limited 
by the provisions of this act. The Federal reserve bank so incorpo¬ 
rated shall have succession for a period of twenty years from its or¬ 
ganization, unless sooner dissolved by act of Congress. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 113 


Every Federal reserve bank shall be conducted under the over¬ 
sight and control of a board of directors, whose powers shall be the 
same as those conferred upon the boards of directors of national 
banking associations under existing law, not inconsistent with the 
provisions of this act. Such board of directors shall be constituted 
and elected as heieinafter specified and shall consist of nine mem¬ 
bers, holding office for three years, and divided into three classes, 
designated as classes A, B, and C. 

Class A shall consist of three members, who shall be chosen by and 
be representative of the stock-holding banks. 

Class B shall consist of three members, who shall be representative 
of the general public interests of the reserve district. 

Class C shall consist of three members, who shall be designated by 
the Federal reserve board. 

Directors of class A shall be chosen in the following manner: 

It shall be the duty of the chairman of the board of directors of the 
Federal reserve bank of the district in which each such bank is situ¬ 
ated to classify the member banks of the said district into three gen¬ 
eral groups or divisions. Each such group shall contain as nearly as 
may be one-third of the aggregate number of said member banks of 
the said district and shall consist, as nearly as may be, of banks of 
similar capitalization. The said groups shall be designated by num¬ 
ber at the pleasure of the chairman of the board of directors of the 
Federal reserve bank. 

At a regularly called directors’ meeting of each member bank in 
the Federal reserve district aforesaid, the board of directors of such 
member bank shall elect by ballot one of its own members as a district 
reserve elector and shall certify his name to the chairman of the board 
of directors of the Federal reserve bank of the district. The said 
chairman shall establish lists of the district reserve electors, class A, 
thus named by banks in each of the aforesaid three groups, and shall 
transmit one list to each such elector in each group. Every elector 
shall, within fifteen days of the receipt of the said list, select and cer¬ 
tify to the said chairman from among the names on the list pertaining 
to his group, transmitted to him by the chairman, one name, not his 
own, as representing his choice for Federal reserve director, class A. 
The name receiving the greatest number of votes, not less than a 
majority, shall be designated by said chairman as Federal reserve 
director for the group to which he belongs. In case no candidate 
shall receive a majority of all votes cast in any district, the chairman 
aforesaid shall establish an eligible list, consisting of the three names 
receiving the greatest number of votes on the first ballot, and shall 
transmit said list to the electors in each of the groups of banks estab¬ 
lished by him. Each elector shall at once select and certify to the 
said chairman from among the three persons submitted to him his 
choice for Federal reserve director, class A, and the name receiving 
the greatest number of such votes shall be declared by the chairman 
as Federal reserve director, class A. In case of a tie vote the balloting 
shall continue in the manner hereinbefore prescribed until one can¬ 
didate receives more votes than either of the others. 

Directors of class B shall be chosen by the electors of the respec¬ 
tive groups at the same time and in the same manner prescribed for 
directors of class A, except that they must be selected from a list of 
names furnished, one by each member bank, and such names shall 
in no case be those of officers or directors of any bank or banking 
&S29. 0 —H. Kept. 69, 63-1-8. 


114 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


association. They shall not accept office as such during the term of 
their service as directors of the Federal reserve bank. They shall be 
fairly representative of the commercial, argicultural, or industrial 
interests of their respective districts. The Federal reserve board 
shall have power at its discretion to remove any director of class B 
in any Federal reserve bank if it should appear at any time that 
such director does not fairly represent the commercial, agricultural, 
or industrial interests of his district. 

Three directors belonging to class C shall be chosen directly by the 
Federal reserve board, who shall be residents of the district for 
which they are selected, one of whom shall be designated by said 
board as chairman of the board of directors of the Federal reserve 
bank of the district to which he is appointed and shall be designated 
as “Federal reserve agent.” He shall be a person of tested banking 
experience; and in addition to his duties as chairman of the board of 
directors of the Federal reserve bank of the district to which he is 
appointed he shall be required to maintain under regulations to be 
established by the Federal reserve board a local office of said board, 
which shall be situated on the premises of the Federal reserve bank 
of the district. He shall make regular reports to the Federal reserve 
board, and shall act as its official representative for the performance 
of the functions conferred upon it by this act. He shall receive an 
annual compensation to be fixed by the Federal reserve board and 
paid monthly by the Federal reserve bank to which he is designated. 

Directors of Federal reserve banks shall receive, in addition to any 
compensation otherwise provided, a reasonable allowance for neces¬ 
sary expenses in attending meetings of their respective boards, which 
amount shall be paid by the respective Federal reserve banks. Any 
compensation that may be provided by boards of directors of Federal 
reserve banks for members of such boards shall be subject to review 
by the Federal reserve board. 

The reserve bank organization committee may, in organizing 
Federal reserve banks for the first time, call such meetings of bank 
directors in the several districts as may be necessary to carry out 
the purposes of this act and may exercise the functions herein con¬ 
ferred upon the chairman of the board of directors of each Federal 
reserve bank pending the complete organization of such bank. 

At the first meeting of the full board of directors of each Federal 
reserve bank after organization it shall be the duty of the directors of 
classes A and B and 0, respectively, to designate one of the members 
of each class whose term of office shall expire in one year from the 
first of January nearest to date of such meeting, one whose term of 
office shall expire at the end of two years from said date, and one 
whose term of office shall expire at the end of three years from said 
date ; Thereafter every director of a Federal reserve bank chosen as 
hereinbefore provided shall hold office for a term of three years; but 
the chairman of the board of directors of each Federal reserve bank 
designated by the Federal reserve board, as hereinbefore described, 
shall be removable at the pleasure of the said board without notice, 
and his successor shall hold office during the unexpired term of the 
director in whose place he was appointed. Vacancies that may 
occur in the several classes of directors of Federal reserve banks may 
be filled in the manner provided for the original selection of such 
directors, such appointees to hold office for the unexpired terms of 
their predecessors. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 115 


INCREASE AND DECREASE OF CAPITAL. 

Sec. 5. That shares of the capital stock of Federal reserve banks 
shall not be transferable, nor be hypothecated. In case a member 
bank increases its capital, it shall thereupon subscribe for an additional 
amount of capital stock of the Federal reserve bank of its district 
equal to twenty per centum of the bank’s own increase of capital, ten 
per centum of said subscription to be paid in cash in the manner here¬ 
inbefore provided for original subscription, and ten per centum to 
become a liability of the member bank according to the terms of the 
original subscription. A bank applying for stock in a Federal reserve 
bank at any time after the formation of the latter must subscribe for 
an amount of the capital of said Federal reserve bank equal to twenty 
per centum of the capital stock of said subscribing bank, paying there¬ 
for its par value in accordance with the terms prescribed by section 
two of this act. When the capital stock of any Federal reserve bank 
has been increased either on account of the increase of capital stock of 
member banks or on account of the increase in the number of member 
banks, the board of directors shall make and execute a certificate to 
the Comptroller of the Currency showing said increase in capital, the 
amount paid in, and by whom paid. In case a member bank reduces 
its capital stock it shall surrender a proportionate amount of its hold¬ 
ings in the capital of said Federal reserve bank, and in case a member 
bank goes into voluntary liquidation it shall surrender all of its hold¬ 
ings of the capital stock of said Federal reserve bank. In either case 
the shares surrendered shall be canceled and such member bank shall 
receive in payment therefor, under regulations to be prescribed by the 
Federal reserve board, a sum equal to its cash paid subscriptions on 
the shares surrendered. 

Sec. 6. That if any member bank shall become insolvent and a 
receiver be appointed the stock held by it in said Federal reserve 
bank shall be canceled and the balance, after deducting from the 
amount of its cash-paid subscriptions all debts due by such insolvent 
bank to said Federal reserve bank, shall be paid to the receiver of 
the insolvent bank. Whenever the capital stock of a Federal reserve 
bank is reduced, either on account of a reduction in capital stock of 
any member bank or of the liquidation or insolvency of any such 
member bank, the board of directors shall make and execute a 
certificate to the Comptroller of the Currency showing such reduc¬ 
tion of capital stock and the amount repaid to such bank. 

DIVISION OF EARNINGS. 

Sec. 7. That after the payment of all necessary expenses and taxes 
of a Federal reserve bank,* the member banks shall be entitled to 
receive an annual dividend of five per centum on the paid-in capital 
stock, which dividend shall be cumulative. One-half of the net 
earnings, after the aforesaid dividend claims have been fully met, 
shall be paid into a surplus fund until such fund shall amount to 
twenty per centum of the paid-in capital stock of such bank, and of 
the remaining one-half sixty per centum shall be paid to the United 
States and forty per centum to the member banks in the ratio of their 
average balances with the Federal reserve bank for the preceding 


116 CHANGES IN THE BANKING AND CUKRENCY SYSTEM. 

year. Whenever and so long as the surplus fund of a Federal reserve 
bank amounts to twenty per centum of the paid-in capital stock and 
the member banks shall nave received the dividends at the rate of 
five per centum per annum hereinbefore provided for, sixty per 
centum of all excess earnings shall be paid to the United States and 
forty per centum to the member banks in proportion to their annual 
average balances with such Federal reserve bank : all earnings derived 
by the United States from Federal reserve banks shall constitute a 
sinking fund to be held for the reduction of the outstanding bonded 
indebtedness of the United States, said reduction to be accomplished 
under regulations to be prescribed by the Secretary of the Treasury. 
Should a Federal reserve bank be dissolved or go into liquidation, 
the surplus fund of said bank, after the payment of all debts and 
dividend requirements as hereinbefore provided for, shall be paid to 
and become the property of the United States. 

Every Federal reserve bank incorporated under the terms of this 
act and the capital stock therein held by member banks shall be 
exempt from Federal, State, and local taxation, except in respect to 
taxes upon real estate. 

Sec. 8. That any national banking association heretofore organized 
may upon application at any time within one year after the passage 
of this act, and with the approval of the Comptroller of the Currency, 
be granted, as herein provided, all the rights, and be subject to all 
the liabilities, of national banking associations organized subsequent 
to the passage of this act: Provided , That such application on the part 
of such associations shall be authorized by the consent in writing of 
stockholders owning not less than a majority of the capital stock of 
the association. Any national banking association now organized 
which shall not, within one year after the passage of this act, become 
a national banking association under the provisions hereinbefore 
stated, or which shall fail to comply with any of the provisions of 
this act applicable thereto, shall be dissolved; but such dissolution 
shall not take away or impair any remedy against such corporation, 
its stockholders or officers, for any liability or penalty which shall 
have previously been incurred. 

Sec. 9. That any bank or banking association incorporated by spe¬ 
cial law of any State or of the United States, or organized under the 
general laws of any State or the United States, and having an unim¬ 
paired capital sufficient to entitle it to become a national banking 
association under the provisions of existing laws, may, by the consent 
in writing of the shareholders owning not less than fifty-one per cen¬ 
tum of the capital stock of such bank or banking association, and with 
the approval of the Comptroller of the Currency, become a national 
banking association under its former name or by any name approved 
by the comptroller. The directors thereof may continue to be the 
directors of the association so organized until others are elected or 
appointed in accordance with the provisions of the law. When the 
comptroller has given to such bank or banking association a certifi¬ 
cate that the provisions of this act have been complied with, such bank 
or banking association, and all its stockholders, officers, and employ¬ 
ees, shall have the same powers and privileges, and shall be subject to 
the same duties, liabilities, and regulations, in all respects, as shall 
have been prescribed by this act or by the national banking act for 
associations originally organized as national banking associations. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 117 


STATE BANKS AS MEMBERS. 

Sec. 10. That from and after the passage of this act any bank or 
banking association or trust company incorporated by special law of 
any State, or organized under the general laws of any State or the 
United States, may make application to the Federal reserve board 
hereinafter created for the nght to subscribe to the stock of the Fed¬ 
eral reserve bank organized or to be organized within the Federal 
reserve district where the applicant is located. The Federal reserve 
board, under such rules and regulations as it may prescribe, subject 
to the provisions of this section, shall permit such applying bank to 
become a stockholder in the Federal reserve bank of the district in 
which such applying bank is located. Whenever the Federal re¬ 
serve board shall permit such an applying bank to become a stock¬ 
holder in the Federal reserve bank of the district in which the apply¬ 
ing bank is located, stock shall be issued and paid for under the rules 
and regulations in this act provided for national banks which become 
stockholders in Federal reserve banks. 

It shall be the duty of the Federal reserve board to establish 
by-laws for the general government of its conduct in acting upon 
applications made by the State banks and banking associations and 
trust companies hereinbefore referred to for stock ownership in Fed¬ 
eral reserve banks. Such by-laws shall require applying banks not 
organized under Federal law to comply with the reserve requirements 
and submit to the inspection and regulation provided for in this and 
other laws relating to national banks. No such applying bank shall 
be admitted to stock ownership in a Federal reserve bank unless it 

P ossesses a paid-up unimpaired capital sufficient to entitle it to 
ecome a national banking association in the place where it is situ¬ 
ated, under the provisions of the national banking act, and conforms 
to the provisions herein prescribed for national banking associations 
of similar capitalization and to the regulations of the Federal reserve 
board. 

If at any time it shall appear to the Federal reserve board that a 
banking association or trust company organized under the laws of 
any State or of the United States has failed to comply with the pro¬ 
visions of this section or the regulations of the Federal reserve board, 
it shall be within the power of the said board to require such banking 
association or trust company to surrender its stock in the Federal 
reserve bank in which it holds stock upon receiving from such Federal 
reserve bank the cash-paid subscriptions to the said stock in current 
funds, and said Federal reserve bank shall, upon notice from the 
Federal reserve board, be required to suspend said banking associa¬ 
tion or trust company from further privileges of membership, and 
shall within thirty days of such notice cancel and retire its stock and 
make payment therefor in the manner herein provided. 

FEDERAL RESERVE BOARD. 

Sec. 11. That there shall be created a Federal reserve board, 
which shall consist of seven members, including the Secretary of the 
Treasury, the Secretary of Agriculture, and the Comptroller of the 
Currency, who shall be members ex officio, and four members chosen 
by the President of the United States, by and with the advice and 


118 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


consent of the Senate. In selecting the four appointive members of 
the Federal reserve board, not more than one of whom shall be 
selected from any one Federal reserve district, the President shall 
have due regard to a fair representation of different geographical 
divisions of the country. The four members of the Federal reserve 
board chosen by the President and confirmed as aforesaid shall devote 
their entire time to the business of the Federal reserve board and 
shall each receive an annual salary of $10,000, together with an allow¬ 
ance for actual necessary traveling expenses, and the Comptroller of 
the Currency, as ex officio member of said Federal reserve board, 
shall, in addition to the salary now paid him as comptroller, receive 
the sum of $5,000 annually for his services as a member of said board. 
Of the members thus appointed by the President not more than two 
shall be of the same political party, and at least one shall be a person 
experienced in banking. One shall be designated by the President 
to serve for two, one for four, one for six, and one for eight years, 
respectively, and thereafter each member so appointed shall serve 
for a term of eight years unless sooner removed for cause by the 
President. Of the four persons thus appointed, one shall be desig¬ 
nated by the President as manager and one as vice manager of the 
Federal reserve board. The manager of the Federal reserve board, 
subject to the supervision of the Secretary of the Treasury and Fed¬ 
eral reserve board, shall be the active executive officer of the Federal 
reserve board. 

The Federal reserve board shall have power to levy semiannually 
upon the Federal reserve banks, in proportion to capital stock, an 
assessment sufficient to pay its estimated expenses for the half year 
succeeding the levying of such assessment, together with any deficit 
carried forward from the preceding half year. 

The first meeting of the Federal reserve board shall be held in 
Washington, District of Columbia, as soon as may be after the pas¬ 
sage of this act, at a date to be fixed by the reserve bank organiza¬ 
tion committee. The Secretary of the Treasury shall be ex officio 
chairman of the Federal reserve board. No member of the Federal 
oeserve board shall be an officer or director of any bank or banking 
institution or Federal reserve bank nor hold stock in any bank or 
banking institution; and before entering upon his duties as a member 
of the Federal reserve board he shall certify under oath to the Sec¬ 
retary of the Treasury that he has complied with this requirement. 
Whenever a vacancy shall occur, other than by expiration of term, 
among the four members of the Federal reserve board chosen by the 
President, as above provided, a successor shall be appointed by the 
President, with the advice and consent of the Senate, to filPsuch 
vacancy, and when chosen shall hold office for the unexpired term of 
the member whose place he is selected to fill. 

The Federal reserve board shall annually make a report of its 
fiscal operations to the Speaker of the House of Representatives, who 
shall cause the same to be printed for the information of the Congress. 

Section three hundred and twenty-four of the Revised Statutes of 
the United States shall be amended so as to read as follows: “There 
shall be in the Department of the Treasury a bureau charged, except 
as in this act otherwise provided, with the execution of all laws passed 
by Congress relating to the issue and regulation of currency issued by 
or through banking associations, the chief officer of which bureau 


CHANGES IN THE BANKING AND CUKRENCY SYSTEM. 119 

shall be called the Comptroller of the Currency, and shall perform his 
duties under the general direction of the Secretary of the Treasury, 
acting as the chairman of the Federal reserve board:” Provided , 
however , That nothing herein contained shall be construed to affect 
any power now vested by law in the Comptroller of the Currency or 
the Secretary of the Treasury. 

Sec. 12. That the Federal reserve board hereinbefore established 
shall be authorized and empowered: 

(a) To examine at its discretion the accounts, books, and affairs 
of each Federal reserve bank and to require such statements and 
reports as it may deem necessary. The said board shall publish 
once each week a statement showing the condition of each Federal 
reserve bank and a consolidated statement for all Federal reserve 
banks. Such statements shall show in detail the assets and liabilities 
of such Federal reserve banks, single and combined, and shall furnish 
full information regarding the character of the lawful money held as 
reserve and the amount, nature, and maturities of the paper owned 
by Federal reserve banks. 

(b) To permit or require, in time of emergency, Federal reserve 
banks to rediscount the discounted prime paper of other Federal 
reserve banks, at least five members of the Federal reseive board 
being present when such action is taken and all present consenting 
to the requirement. The exercise of this compulsory rediscount power 
by the Federal reserve board shall be subject to an interest charge 
to the accommodated bank of not less than one nor greater than three 
per centum above the higher of the rates prevailing in the districts 
immediately affected. 

(c) To suspend for a period not exceeding thirty days (and to 
renew such suspension for periods not to exceed fifteen days) any and 
every reserve requirement specified in this act: Provided , That it 
shall establish a graduated tax upon the amounts by which the 
reserve requirements of this act may be permitted to fall below the 
level hereinafter specified, such tax to be uniform in its application 
to all banks; but said board shall not suspend the reserve require¬ 
ments with reference to Federal reserve notes. 

(d) To supervise and regulate the issue and retirement of Federal 
reserve notes and to prescribe the form and tenor of such notes. 

(e) To add to the number of cities classified as reserve and central 
reserve cities under existing law in which national banking associa¬ 
tions are subject to the reserve requirements set forth in section 
twenty of this act; or to reclassify existing reserve and central 
reserve cities and to designate the banks therein situated as country 
banks at its discretion. 

(f) To suspend the officials of Federal reserve banks and, for cause 
stated in writing with opportunity of hearing, require the removal of 
said officials for incompetency, dereliction of duty, fraud, or deceit, 
such removal to be subject to approval by the President of the 
United States. 

(g) To require the writing off of doubtful or worthless assets upon 
the books and balance sheets of Federal reserve banks. 

(h) To suspend, for cause relating to violation of any of the pro¬ 
visions of this act, the operations of any Federal reserve bank and 
appoint a receiver therefor. 

(i) To perform the duties, functions, or services specified or implied 
in this act. 


120 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


FEDERAL ADVISORY COUNCIL. 

Sec. 13. There is hereby created a Federal advisory council, 
which shall consist of as many members as there are Federal reserve 
districts. Each Federal reserve bank by its board of directors shall 
annually select from its own Federal reserve district one member of 
said council, who shall receive no compensation for his services, but 
may be reimbursed for actual necessary expenses. The meetings 
of said advisory council shall be held at Washington, District of 
Columbia, at least four times each year, and oftener if called by 
the Federal reserve board. The council may select its own officers 
and adopt its own methods of procedure, and a majority of its 
members shall constitute a quorum for the transaction of business. 
Vacancies in the council shah be filled by the respective reserve 
banks, and members selected to fill vacancies shall serve for the 
unexpired term. 

The Federal advisory council shall have power (1) to meet and 
confer directly with the Federal reserve board on general business 
conditions; (2) to make oral or written representations concerning 
matters within the jurisdiction of said board; (3) to call for complete 
information and to make recommendations in regard to discount 
rates, rediscount business, note issues, reserve conditions in the 
various districts, the purchase and sale of gold or securities by 
reserve banks, open-market operations by said banks, and the gen¬ 
eral affairs of the reserve banking system. 

REDISCOUNTS. 

Sec. 14. That any Federal reserve bank may receive from any 
member bank or, solely for exchange purposes, from other Federal 
reserve banks deposits of current funds in lawful money, national- 
bank notes, Federal reserve notes, or checks and drafts upon solvent 
banks, payable upon presentation. 

Upon the indorsement of any member bank any Federal reserve 
bank may discount notes and bills of exchange arising out of com¬ 
mercial transactions; that is, notes and bills of exchange issued or 
drawn for agricultural, industrial, or commercial purposes, or the 
proceeds of which have been used, or may be used, for such puiposes, 
the Federal reserve board to have the right to determine or define 
the character of the paper thus eligible for discount, within the 
meaning of this act, but such definition shall not include notes or 
bills issued or drawn for the purpose of carrying or trading in stocks, 
bonds, or other investment securities; nor shall anything herein con¬ 
tained be construed to prohibit such notes and bills of exchange, 
secured by staple agricultural products or other goods, wares, or 
merchandise from being eligible for such discount. Notes and bills 
admitted to discount under the terms of this paragraph must have a 
maturity of not more than ninety days. 

Upon the indorsement of any member bank any Federal reserve 
bank may discount the paper of the classes hereinbefore described 
having a maturity of more than sixty and not more than one hundred 
and twenty days when its own cash reserve exceeds thirty-three and 
one-third per centum of its total outstanding demand liabilities exclu¬ 
sive of its outstanding Federal reserve notes by an amount to be 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 121 

fixed by the Federal reserve board; but not more than fifty per centum 
of the total paper so discounted for any member bank shall have a 
maturity of more than ninety days. 

Upon the indorsement of any member bank any Federal reserve 
bank may discount acceptances of such banks which are based on 
the exportation or importation of goods and which mature in not 
more than six months and bear the signature of at least one member 
bank in addition to that of the acceptor. The amount so discounted 
shall at no time exceed one-half the capital stock of the bank for 
which the rediscounts are made. 

The aggregate of such notes and bills bearing the signature or 
indorsement of any one person, company, firm, or corporation 
rediscounted for any one bank shall at no time exceed ten per centum 
of the unimpaired capital and surplus of said bank; but this restric¬ 
tion shall not apply to the discount of bills of exchange drawn in 
good faith against actually existing values. 

Any national bank may, at its discretion, accept drafts or bills of 
exchange drawn upon it having not more than six months’ sight to 
run and growing out of transactions involving the importation or 
exportation of goods; but no bank shall accept such bills to an 
amount equal at any time in the aggregate to more than one-half the 
face value of its paid-up and unimpaired capital. 

OPEN-MARKET OPERATIONS. 

Sec. 15. That any Federal reserve bank may, under rules and 
regulations prescribed by the Federal reserve board, purchase and 
sell in the open market, either from or to domestic or foreign banks, 
firms, corporations, or individuals, prime bankers’ bills, and bills of 
exchange of the kinds and maturities by this act made eligible for 
rediscount, and cable transfers. 

Every Federal reserve bank shall have power (a) to deal in gold coin 
and bullion both at home and abroad, to make loans thereon, and to 
contract for loans of gold coin or bullion, giving therefor, when neces¬ 
sary, acceptable security, including the hypothecation of United 
States bonds; (b) to invest in United States bonds, and bonds issued 
by any State, county, district, or municipality; (c) to purchase from 
member banks and to sell, with or without its indorsement, bills of 
exchange arising out of commercial transactions, as hereinbefore 
defined, payable in foreign countries; but such bills of exchange must 
have not exceeding ninety days to run and must bear the signature of 
two or more responsible parties, of which the last shall be that of a 
member bank; (d) to establish each week, or as much oftener as 
required, subject to review and determination of the Federal reserve 
board, a rate of discount to be charged by such bank for each class 
of paper, which shall be fixed with a view of accommodating the com¬ 
merce of the country; and (e) with the consent of the Federal reserve 
board, to open and maintain banking accounts ifi foreign countries 
and establish agencies in such countries wheresoever it may deem 
best for the purpose of purchasing, selling, and collecting foreign bills 
of exchange, and to buy and sell with or without its indorsement, 
through such correspondents or agencies, prime foreign bills of ex¬ 
change arising out of commercial transactions which have not exceed¬ 
ing ninety days to run and which bear the signature of two or more 
responsible parties. 


122 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


GOVERNMENT DEPOSITS. 

Sec. 16. That all moneys now held in the general fund of the 
Treasury shall, upon the direction of the Secretary of the Treasury, 
within twelve months after the passage of this act, be deposited in 
Federal reserve banks, which banks shall act as fiscal agents of the 
United States; and thereafter the revenues of the Government shall 
be regularly deposited in such banks, and disbursements shall be 
made by checks drawn against such deposits. 

The Secretary of the Treasury shall, subject to the approval of the 
Federal reserve board, from time to time, apportion the funds of 
the Government among the said Federal reserve banks, distributing 
them, as far as practicable, equitably between different sections, anti 
may, at their joint discretion, charge interest thereon and fix, from 
month to month, a rate which shall be regularly paid by the banks 
holding such deposits: Provided , That no Federal reserve bank shall 
pay interest upon any deposits except those of the United States. 

No Federal reserve bank shall receive or credit deposits except 
from the Government of the United States, its own member banks, 
and, to the extent permitted by this act, from other Federal reserve 
banks. All domestic transactions of the Federal reserve banks in¬ 
volving a rediscount operation or the creation of deposit accounts 
shall be confined to the Government and the depositing and Federal 
reserve banks, with the exception of the purchase or sale of Govern¬ 
ment or State securities or of gold coin or bullion. 

NOTE ISSUES. 

Sec. 17. That Federal reserve notes, to be issued at the discretion 
of the Federal reserve board for the purpose of making advances to 
Federal reserve banks as hereinafter set forth and for no other pur¬ 
pose, are hereby authorized. The said notes shall be obligations of 
the United States and shall be receivable for all taxes, customs, and 
other public dues. They shall be redeemed in gold or lawful money 
on demand at the Treasury Department of the United States, in the 
city of Washington, District of Columbia, or at any Federal reserve 
bank. 

Any Federal reserve bank may, upon vote of its directors, make 
application to the local Federal reserve agent for such amount of the 
Treasury notes hereinbefore provided for as it may deem best*. Such 
application shall be accompanied with a tender to the local Federal 
reserve agent of collateral security to protect the notes for which 
application is made equal in amount to the sum of the notes thus 
applied for. The collateral security thus offered shall be notes and 
bills accepted for rediscount under the provisions of section fourteen 
of this act, and the Federal reserve agent shall each day notify the 
Federal reserve board of issues and withdrawals of notes to and by 
the Federal reserve bank to which he is accredited. The said Federal 
reserve board shall be authorized at any time to call upon a Federal 
reserve bank for additional security to protect the Federal reserve 
notes issued to it. 

Whenever any Federal reserve bank shall pay out or disburse 
Federal reserve notes issued to it as hereinbefore provided, it shall 
segregate in its own vaults and shall carry to a special reserve account 
on its books gold or lawful money equal in amount to thirty-three and 
one-third per centum of the reserve notes so paid out by it, such 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 123 


reserve to be used for the redemption of said reserve notes as pre¬ 
sented; but any Federal reserve bank so using any part of such re¬ 
serve to redeem notes shall immediately carry to said reserve account 
an amount of gold or lawful money sufficient to make said reserve 
equal to thirty-three and one-third per centum of its outstanding 
Treasury notes. Notes so paid out shall bear upon their faces a dis¬ 
tinctive letter and serial number, which shall be assinged by the Fed¬ 
eral reserve board to each Federal reserve bank. Whenever Federal 
reserve notes issued through one Federal reserve bank shall be re¬ 
ceived by another Federal reserve bank they shall be returned for 
redemption to the Federal reserve bank through which they were 
originally issued, or shall be charged off against Government deposits 
and returned to the Treasury of the United States, or shall be pre¬ 
sented to the said Treasury for redemption. No Federal reserve 
bank shall pay out notes issued through another under penalty of a 
tax of ten per centum upon the face value of notes so paid out. 
Notes presented for redemption at the Treasury of the United States 
shall be paid and returned to the Federal reserve banks through 
which they were originally issued, and Federal reserve notes received 
by the Treasury otherwise than for redemption shall be exchanged 
for lawful money out of the five per centum redemption fund herein¬ 
after provided and returned as hereinbefore provided to the reserve 
bank through which they were originally issued. 

The Federal reserve board shall have power, in its discretion, to 
require Federal reserve banks to maintain on deposit in the Treasury 
of the United States a sum in gold equal to five per centum of such 
amount of Federal reserve notes as may be issued to them under the 
provisions of this act; but such five per centum shall be counted and 
included as part of the thirty-three and one-third per centum reserve 
hereinbefore required. The said board shall also have the right to 
grant in whole or in part or to reject entirely the application of any 
Federal reserve bank for Federal reserve notes; but to the extent and 
in the amount that such application may be granted the Federal 
reserve board shall, through its local Federal reserve agent, deposit 
Federal reserve notes with the bank so applying, and such bank shall 
be charged with the amount of such notes and shall pay such rate of 
interest on said amount as may be established by the Federal reserve 
board, which rate shall not be less than one-half of one per centum per 
annum, and the amount of such Federal reserve notes so issued to any 
such bank shall, upon delivery, become a first and paramount lien on 
all the assets of such bank. 

Any Federal reserve bank may at any time reduce its liability 
for outstanding Federal reserve notes by the deposit of Federal reserve 
notes, whether issued to such bank or to some other reserve bank, 
or lawful money of the United States, or gold bullion, with any 
Federal reserve agent or with the Treasurer of the United States, 
and such reduction shall be accompanied by a corresponding reduc¬ 
tion in the required reserve fund of lawful money set apart for the 
redemption of said notes and by the release of a corresponding amount 
of the collateral security deposited with the local Federal reserve 
agent. 

Any Federal reserve bank may at its discretion withdraw collateral 
deposited with the local Federal reserve agent for the protection of 
Federal reserve notes deposited with it and shall at the same time 
substitute other collateral of equal value approved by the Federal 


124 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

reserve agent under regulations to be prescribed by the Federal 
reserve board. 

It shall be the duty of every Federal reserve bank to receive on 
deposit, at par and without charge for exchange or collection, checks 
and drafts drawn upon any of its depositors or by any of its depositors 
upon any other depositor and checks and drafts drawn by any deposi¬ 
tor in any other Federal reserve bank upon funds to the credit of 
said depositor in said reserve bank last mentioned, nothing herein 
contained to be construed as prohibiting member banks from making 
reasonable charges to cover actual expenses incurred in collecting 
and remitting funds for their patrons. The Federal reserve board 
shall make and promulgate from time to time regulations governing 
the transfer of funds at par among Federal reserve banks, and may 
at its discretion exercise the functions of a clearing house for such 
Federal reserve banks, or may designate a Federal reserve bank to 
exercise such functions, and may also require each such bank to 
exercise the functions of a clearing house for its member banks. 

Sec. 18. That so much of the provisions of section fifty-one hun¬ 
dred and fifty-nine of the Revised Statutes of the United States, and 
section four of the act of June twentieth, eighteen hundred and. 
seventy-four, and section eight of the act of July twelfth, eighteen 
hundred and eighty-two, and of any other provisions of existing stat¬ 
utes, as require that before any national banking association shall 
be authorized to commence banking business it shall transfer and 
deliver to the Treasurer of the United States a stated amount of 
United States registered bonds be, and the same is hereby, repealed. 

REFUNDING BONDS. 

Sec. 19. That upon application the Secretary of the Treasury shall 
exchange the two per centum bonds of the United States bearing 
the circulation privilege deposited by any national banking associa¬ 
tion with the Treasurer of the United States as security for circulating 
notes for three per centum bonds of the United States without the 
circulation privilege, payable after twenty years from date of issue, 
and exempt from Federal, State, and municipal taxation both as to 
income and principal. No national bank shall, in any one year, 
present two per centum bonds for exchange in the manner herein¬ 
before provided to an amount exceeding five per centum of the total 
amount of bonds on deposit with the .Treasurer by said bank for 
circulation purposes. Should any national bank faif in any one year 
to so exchange its full quota of two per centum bonds under the terms 
of this act, the Secretary of the Treasury may permit any other 
national bank or banks to exchange bonds in excess of the five per 
centum aforesaid in an amoupt equal to the deficiency caused by the 
failure of any one or more banks to make exchange in any one year, 
allotment to be made to applying banks in proportion to their holdings 
of bonds. At the expiration of twenty years from the passage of this 
act everv holder of United States two per centum bonds then outstand¬ 
ing shall receive payment at par and accrued interest. After twentv 
years from the date of the passage of this act national-bank notes still 
remaining outstanding shall be recalled and redeemed by the national 
banking associations issuing the same within a period and under regu¬ 
lations to be prescribed by the Federal reserve board, and notes still 
remaining in circulation at the end of such period shall be secured by 
an equal amount of lawful money to be deposited in the Treasury of 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 125 


the United States by the banking associations originally issuing such 
notes. Meanwhile every national bank may continue to apply for 
and receive circulating notes from the Comptroller of the Currency 
based upon the deposit of two per centum bonds or of any other bonds 
bearing the circulation privilege; but no national bank shall be per¬ 
mitted to issue other circulating notes except such as are secured as 
in this section provided or to issue or to make use of any substitute 
for such circulating notes in the form of clearing-house loan certifi¬ 
cates, cashier’s checks, or other obligation. 

BANK RESERVES. 

Sec. 20. That from and after the date when the Secretary of the 
Treasury shall have officially announced, in such manner as he may 
elect, the fact that a Federal reserve bank has been established in any 
designated district, every banking association within said district 
which shall have subscribed for stock in such Federal reserve bank 
shall be required to establish and maintain reserves as follows: 

(a) If a country bank as defined by existing law, it shall hold and 
maintain a reserve equal to twelve per centum of the aggregate amount 
of its deposits, not including savmgs deposits hereinafter provided 
for. Five-twelfths of such reserve shall consist of money which 
national banks may under existing law count as legal reserve, held 
actually in the bank’s own vaults; and for a period of fourteen 
months from the date aforesaid at least three-twelfths and thereafter 
at least five-twelfths of such reserve shall consist of a credit balance 
with the Federal reserve bank of its district. The remainder of the 
twelve per centum reserve hereinbefore required may, for a period of 
thirtv-six months from and after the date fixed by the Secretary of 
the Treasury, as hereinbefore provided, consist of balances due from 
national banks in reserve or central reserve cities as now defined by 
law. From and after a date thirty-six months subsequent to the 
date fixed by the Secretary of the Treasury, as hereinbefore provided, 
the said remainder of the twelve per centum reserve required of each 
country bank shall consist either m whole or in part of reserve money 
in the bank’s own vaults or of credit balance with the Federal reserve 
bank of its district. 

(b) If a reserve city bank as defined by existing law, it shall hold 
and maintain, for a period of sixty days from the date fixed by the 
Secretary of the Treasury as hereinbefore provided, a reserve equal 
to twenty per centum of the aggregate amount of its deposits, not 
including savings deposits hereinafter provided for, and permanently 
thereafter eighteen per centum. At least one-half of such reserve 
shall consist of money which national banks may under existing law 
count as legal reserve, held actually in the bank’s own vaults. 
After sixty days from the date aforesaid, and for a period of one 
year, at least three-eighteenths and permanently thereafter at least 
five-eighteenths of such reserve shall consist of a credit balance with 
the Federal reserve bank of its district. The remainder of the 
reserve in this paragraph required may, for a period of thirty-six 
months from and after the date fixed by the Secretary of the Treasury 
as hereinbefore provided, consist of balances due from national banks 
in central reserve cities as now defined by law. From and after a 
date thirty-six months subsequent to the date fixed by the Secretary 
of the Treasury as hereinbefore provided, the said remainder of the 
eighteen per centum reserve required of each reserve city bank shall 


126 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

consist either in whole or in part of reserve money in the bank's 
own vaults or of credit balance with the Federal reserve bank of its 
district. 

(c) If a central reserve city bank as defined by existing law, it shall 
hold and maintain for a period of sixty days from the date fixed by the 
Secretary of the Treasury as hereinbefore provided a reserve equal to 
twenty per centum of the aggregate amount of its deposits, not in¬ 
cluding savings deposits hereinafter provided for, and permanently 
thereafter eighteen per centum. At least one-half of such reserve shall 
consistof money which national banks may under existing law count as 
legal reserve, held actually in the bank's own vaults. After sixty 
days from the date aforesaid, and thereafter for a period of one year, 
at least three-eighteenths and permanently thereafter at least five- 
eighteenths of such reserve shall consist of a credit balance with the 
Federal reserve bank of its district. The remainder of the eighteen 
per centum reserve required of each central reserve city bank shall 
consist either in whole or in part of reserve money actually held in 
its own vaults or of credit balance with the Federal reserve bank of 
its district. 

Sec. 21. That so much of sections two and three of the act of June 
twentieth, eighteen hundred and seventy-four, entitled “An act 
fixing the amount of United States notes, providing for a redistribu¬ 
tion of the national bank currency, and for other purposes," as pro¬ 
vides that the fund deposited by any national banking association 
with the Treasurer of the United States for the redemption of its 
notes shall be counted as a part of its lawful reserve as provided in 
the act aforesaid, be, and the same is hereby, repealed. And from 
and after the passage of this act such fund of five per centum shall in 
no case be counted by any national banking association as a part of 
its lawful reserve. 

Sec. 22. That every Federal reserve bank shall at all times have 
on hand in its own vaults, in gold or lawful money, a sum equal to 
not less than thirty-three and one-third per centum of its outstand¬ 
ing demand liabilities. 

The Federal reserve board may notify any Federal reserve bank 
whose lawful reserve shall be below the amount required to be kept 
on hand to make good such reserve; and if such bank shall fail for 
thirty days thereafter so to make good its lawful reserve, the Federal 
reserve board may appoint a receiver to wind up the business of 
said bank. 

BANK EXAMINATIONS. 

Sec. 23. That the examination of the affairs of every national 
banking association authorized by existing law shall take place at 
least twice in each calendar year and as much oftener as the Federal 
reserve board shall consider necessary in order to furnish a full and 
complete knowledge of its condition. ^The Secretary of the Treasury 
may, however, at any time direct the holding of a special examination. 
The person assigned to the making of such examination of the affairs 
of any national banking association shall have power to call together 
a quorum of the directors of such association, who shall, undei^oath, 
state to such examiner the character and circumstances of such of 
its loans or discounts as he may designate; and from and after the 
passage of this act all bank examiners shall receive fixed salaries, 
the amount whereof shall be determined by the Federal reserve 
board and annually reported to Congress. But the expense of the 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 127 


examinations herein provided for shall be assessed by the Federal 
reserve board upon the associations examined in proportion to 
assets or resources held by such associations upon a date during the 
year in which such examinations are held to be established by the 
Federal reserve board. The Comptroller of the Currency shall so 
arrange the duties of national-bank examiners that no two successive 
examinations of any association shall be made by the same examiner. 

In addition to the examinations made and conducted by the Comp¬ 
troller of the Currency, every Federal reserve bank may, with the 
approval of the Federal reserve board, arrange for special or period¬ 
ical examination of the member banks within its district. Such exam¬ 
ination shall be so conducted as to inform the Federal reserve bank 
under whose auspices it is carried on of the condition of its mem¬ 
ber banks and of the lines of credit which are being extended by 
them. Every Federal reserve bank shall at all times furnish to the 
Federal reserve board such information as may be demanded by the 
latter concerning the condition of any national banking association 
located within the district of the said Federal reserve bank. 

The Federal reserve board shall as often as it deems best, and in 
any case not less frequently than four times each year, order an 
examination of national banking associations in reserve cities. Such 
examinations shall show in detail the total amount of loans made by 
each bank on demand, on time, and the different classes of collateral 
held to protect the various loans, and the lines of credit which are 
being extended by them. The Federal reserve board fchall, at least 
once each year, order an examination of each Federal reserve bank, 
and upon joint application of ten member banks the Federal reserve 
board shall order a special examination and report of the condition 
of any Federal reserve bank. 

Sec. 24. That no national bank shall hereafter make any loan or 
grant any gratuity to any examiner of such bank. Any bank offend¬ 
ing against this provision shall be deemed guilty of a misdemeanor 
and shall be fined not more than $5,000 and a further sum equal to 
the money so loaned or gratuity given; and the officer or officers of a 
bank making such loan or granting such gratuity shall be likewise 
deemed guilty of a misdemeanor and shall be fined not to exceed 
$5,000. Any examiner accepting a loan or gratuity from any bank 
examined by him shall be deemed guilty of a misdemeanor and shall 
be fined not more than $5,000 and a further sum equal to the money 
so loaned or gratuity given, and shall forever thereafter be disquali¬ 
fied from holding office as a national-bank examiner. No national- 
bank examiner shall perform any other service for compensation 
while holding such office. 

No officer or director of a national bank shall receive or be bene¬ 
ficiary, either directly or indirectly, of any fee (other than a legiti¬ 
mate fee paid an attorney at law for legal services), commission, gift, 
or other consideration for or on account of any loan, purchase, sale, 
payment, exchange, or transaction with respect to stocks, bonds, or 
other investment securities or notes, bills of exchange, acceptances, 
bankers’ bills, cable transfers, or mortgages made by or on behalf of 
a national bank of which he is such officer or director. Any person 
violating any provision of this section shall be punished by a fine of 
not exceeding $5,000 or by imprisonment not exceeding five years, or 
both such fine and imprisonment, in the discretion of the court 
having jurisdiction. 


128 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

Except so far as already provided in existing laws, this provision 
shall not take effect until six months after the passage of this act. 

Sec. 25. That from and after the passage of this act the stockhold¬ 
ers of every national banking association shall be held individually 
responsible for all contracts, debts, and engagements of such associa¬ 
tion, each to the amount of his stock therein, at the par value thereof 
in addition to the amount invested in such stock. The stockholders 
in any national banking association who shall have transferred their 
shares or registered the transfer thereof within sixty days next before 
the date of the failure of such association to meet its obligations 
shall be liable to the same extent as if they had made no such transfer; 
but this provision shall not be construed to affect in any way any re¬ 
course wnich such shareholders might otherwise have against those 
in whose names such shares are registered at the time of such failure. 
Section fifty-one hundred and fifty-one, Revised Statutes of the 
United States, is hereby reenacted except in so far as modified by 
this section. 

LOANS ON FARM LANDS. 

Sec. 26. That any national banking association not situated in a 
reserve city or central reserve city may make loans secured by im¬ 
proved and unencumbered farm land, and so much of section fift} r - 
one hundred and thirty-seven of the Revised Statutes as prohibits 
the making of such loans by banks so situated shall be, and the same 
is hereby, repealed; but no such loan shall be made for a longer time 
than twelve months, nor for an amount exceeding fifty per centum 
of the actual value of the property offered as security, and such 
property shall be situated within the Federal reserve district in which 
the bank is located. Any such bank may make such loans in an 
aggregate sum equal to twenty-five per centum of its capital and 
surplus. 

The Federal reserve board shall have power from time to time 
to add to the list of cities in which national banks shall not be per¬ 
mitted to make loans secured upon real estate in the manner described 
in this section. 

SAVINGS DEPARTMENT. 

Sec. 27. That any national banking association may, subsequent 
to a date one year after the organization of the Federal reserve 
board, make application to the Comptroller of the Currency for 
permission to open a savings department. Such application shall 
set forth that the directors of said national bank have by a majority 
vote apportioned a specified percentage of their paid-in capital 
and surplus to said savings department, and to that end have segre¬ 
gated specified assets for the purposes of said department, or that 
cash capital for the said savings department has been obtained 
by subscription to additional issues of the capital stock of said 
national bank: Provided , That the sum in assets or in cash thus 
set apart for the uses of the proposed savings department aforesaid 
shall in no case be less than $25,000, or than a sum equal to twenty 
per centum of the paid-up capital and surplus of the said national 
bank. 

In making the application aforesaid any national banking associa¬ 
tion may further apply for power to act as trustee for mortgage 
loans, subject to the conditions and limitations herein prescribed or 
to be established as hereinafter provided. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 129 

Whenever the Comptroller of the Currency shall have approved any 
such application as hereinbefore provided, he shall so inform the 
a PPb r i n & bank, and thereafter the organization and business con¬ 
ducted or possessed by said bank at the tune of making said applica¬ 
tion, except such as has been specifically segregated for the savings 
department, and subsequent expansions thereof shall be known as 
the commercial department of the said bank. National banks may 
increase or diminish their capital stock in the manner now provided 
by law, but whenever such general increase or reduction of the capital 
stock of any national bank operating upon the provisions of this 
section shall be made such increase or reduction shall be apportioned 
between the commercial and savings departments of the said bank 
as its board of directors shall prescribe, notice of such increase or 
reduction, and of the apportionment thereof, being forthwith given 
to the Comptroller of the Currency; and any such national bank 
may increase or diminish the capital already apportioned to either 
its savings or commercial department to an extent not inconsistent 
with the provisions of this section, notifying the Comptroller of the 
Currency as hereinbefore provided. The savings department for 
which authority has been solicited and granted shall have control 
of the cash or assets apportioned to it as hereinbefore provided, and 
shall be organized under the rules and regulations to be prescribed 
by the Comptroller of the Currency. 

Both the savings and commercial departments so created shall, 
however, be under the control and direction of a single board of 
directors and of the general officers of said bank. 

All business transacted by the commercial department of any such 
national bank shall be in every respect subject to the limitations and 
requirements provided in the national banking act as modified by 
this act, and such business shall henceforward be known as com¬ 
mercial business. 

The savings department of each such national bank shall be author¬ 
ized to accumulate and loan the funds of its depositors, to receive de¬ 
posits of current funds, to loan any funds in its possession upon per¬ 
sonal or real estate security, and to collect the same with interest, 
and to declare and pay dividends or interest both upon demand and 
time deposits. The Federal reserve board is hereby authorized to 
exempt the savings departments of national banking associations 
from any and every restriction upon classes or kinds of business laid 
down in the national banking act, and it shall be the duty of the said 
board within one year after its organization to prepare and publish 
rules and regulations for the conduct of business by such savings de¬ 
partments. The said regulations shall require every national bank 
which shall conduct a savings department and a commercial depart¬ 
ment to segregate in its own vaults the cash and assets belonging to 
such departments respectively and shall prescribe the general forms 
of separate books of account to be used by each such department for 
its exclusive and individual use. The regulations aforesaid shall 
further specify the period of notice for the withdrawal of deposits 
made in the said savings department and shall forbid the acceptance 
of deposits by one department of such national bank from the other 
department of such bank. The Federal reserve board shall make 
and publish at its discretion lists of securities, paper, bonds, and other 
forms of investment, which the savings departments of national banks 


8829°—H. Kept. 69, 63-1-9 



130 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


shall be authorized to buy; and said lists need not be uniform through¬ 
out the United States, but shall be adapted to the conditions of busi¬ 
ness in different sections of the country. 

It shall be the duty of every national bank to maintain, with respect 
to all deposit liabilities of its savings department, a reserve in money 
which may under existing law be counted as reserve, equal to not less 
than five per centum of its total deposit liabilities, and every national 
bank authorized to maintain a savings department is hereby exempted 
from the reserve requirements of the national banking act and of this 
act in respect to the said deposit liabilities of its savings department, 
except as in this section provided. Every regulation made in pursu¬ 
ance of this section shall be duly published, and also posted in every 
member bank having a savings department. 

Every officer, director, or employee of any national bank who shall 
knowingly or willfully violate any of the provisions of this section, or 
any of the regulations of the Federal reserve board, or of the Comp¬ 
troller of the Currency, made under and by virtue of the provisions of 
this section shall be guilty of a felony, and on conviction thereof shall 
be punished by a fine not exceeding $5,000 or by imprisonment not 
exceeding two years. 

FOREIGN BRANCHES. 

Sec. 28. That any national banking association possessing a capital 
of $1,000,000 or more may file application with the Federal reserve 
board, upon such conditions and under such circumstances as may 
be prescribed by the said board, for the purpose of securing authority 
to establish branches in foreign countries for the furtherance of the 
foreign commerce of the United States and to act, if required to do so, 
as fiscal agents of the United States. Such application shall specify, 
in addition to the name and capital of the banking association filing 
it, the foreign country or countries or the dependencies of the United 
States where the banking operations proposed are to be carried on 
and the amount of capital set aside by the said banking association 
filing such application for the conduct of its foreign business at the 
branches proposed by it to be established in foreign countries. The 
Federal reserve board shall have power to approve or to reject such 
application if, in its judgment, the amount of capital proposed to be 
set aside for the conduct of foreign business is inadequate or if for 
other reasons the granting of such application is deemed inexpedient. 

Every national banking association which shall receive authority 
to establish branches in foreign countries shall be required at all times 
to furnish information concerning the condition of such branches to 
the Comptroller of the Currency upon demand, and the Federal 
reserve board may order special examinations of the said foreign 
branches at such time or times as it may deem best. Every such 
national banking association shall conduct the accounts of each 
foreign branch independently of the accounts of other foreign branches 
established by it and of its home office and shall at the end of each 
fiscal period transfer to its general ledger the profit or loss accruing 
at each such branch as a separate item. 

Sec. 29. That all provisions of law inconsistent with or superseded 
by any of the provisions of this act be, and the same are hereby, 
repealed. 

Sec. 30. That the right to amend, alter, or repeal this act is hereby 
expressly reserved. 


Appendix D. 

Reserve required under H. R. 7837, based on deposits reported June 4, 1913. 


Cities, States, and Territories. 

N et deposits sub- 
ject to reserve 
requirements. 

Cash require¬ 
ment under 

H. R. 7837. 

Balance in 
reserve banks 
under H. R. 
7837. 

Optional 
under H. R. 

7837 (per 
cent cash or 
balances). 

New York City. 

$1,093,896,154. 20 
363,020,439.98 
111,170,462. 55 

$98,450,654.00 

32,671.840.00 

10,005,341.00 

$54,694,807. 00 
18,151,022.00 
5,558,523. 00 

$43,755,845.00 
14,520,819.00 
4,446,818.00 

Chicago.”. 

St. Louis. 


Central reserve cities. 

1,568,087,056. 73 

141,127,835.00 

78,404,352.00 

62,723,482.00 


Boston. 

235,937,447.19 
39.297.953.26 
23,836,325. 80 
279,772,336.64 
196,116,426.28 
62,246,492. 72 
28,568,018.15 
1,857,723.80 
25,217,548. 95 
21,629,510. 24 
14,981,247. 51 
4.760,174.05 

21,234,370.00 
3,536,816.00 
2,145,270.00 
25,179,512.00 
17,650,439.00 
5,602,184.00 
2,571,123. 00 
167,195. 00 
2,269,581.00 
1,946,658.00 
1,348,314.00 
428,415.00 
2,667,868.00 
994,724.00 
520,952.00 
2,658,396. 00 
5,416,977.00 
6,176,698. 00 
2,127,512.00 
2,872,404. 00 
4,222,313.00 
4,643,249.00 

11,796,872.00 
1,964,897.00 
1,191,816.00 
13,988,617.00 
9,805,821.00 
3,112,324.00 
1,428,401.00 
92,886.00 
1,260,878. 00 

1 081 476.00 

9,437,497. 00 
1,571,918.00 
953,453.00 
11,190,894.00 
7,844,657.00 
2,489,859.00 
1,142,722.00 
74,309.00 
1,008,703.00 
865,181. 00 
599,249.00 
190,406. 00 
1,185,719.00 
442,099.00 
231 534.00 

Albany. 

Brooklyn. 

Philadelphia. 

Pittsburgh. 

Baltimore. 

Washington. 

Savannah. 

New Orleans. 

Dallas. 

Fort Worth. 

749,062.00 
238,008.00 
1,482,148. 00 

Galveston. 

Houston. 

29.642,962. 90 
11,052,476.24 
5,788,341.06 
29,537,728. 00 
60,188,629. 74 
68,629,965.00 
23,639,013. 72 
31,915,589.99 
46,914,596. 64 
51,591,648.49 

San Antonio. 

552,624.00 
289,417.00 
1,476.887. 00 

Waco. 

Louisville. 

1,181,510.00 
2,407,545. 00 
2,745,199.00 
945,560. 00 
1,276,623.00 
1,876,583.00 
2,063,666. 00 
2,454,580.00 
1, 634,927. 00 

Cincinnati. 

3,009,431.00 
3,431,498.00 
1,181,950. 00 
1,595,779.00 
2,345,729. 00 
2,579,582.00 

Cleveland.. 

Columbus. 

Indianapolis. 

Detroit. 

Milwaukee. 

Minneapolis. 

61'364'504.08 

5,522, 805.00 
3,678,584.00 
926, 442. 00 

3; 068; 225. 00 
2,043,657. 00 
514,688.00 

St. Paul. 

40; 873', 142. 66 
10,293,775.07 
16,043,138.16 

Cedar Rapids. 

'41i;750. 00 

Des Moines. 

1 443,884.00 

802; 157. 00 
180,934. 00 

64i; 726.00 
144,748.00 
519,885.00 
3,262,678.00 

Dubuque. 

3'618,675. 53 
12,997,107.50 

' 325; 683.00 
1,169,740.00 

Sioux fcit v. 

649,856. 00 

Kansas City, Mo. 

81,566,939. 40 
13,335,196. 44 
6.656,099.11 

7; 341 026.00 

4,078; 347.00 
666,759.00 
332,804. 00 
1,956,419.00 

St. Joseph. 

l', 200,169. 00 

' 533; 407.00 

Lincoln".. 

' 599; 048.00 
3,521,555.00 

266; 243.00 

Omaha... 

39 128 378. 20 

1,565', 135.00 
367,584.00 
197,315.00 
135,566. 00 

South Omaha. 

9,189,605. 77 
4,932,871.80 
3,389,138. 20 
6,692,169. 82 
42,731,063.75 
8,355,239.10 

' 827,065. 00 

459 480. 00 

Kansas City, Kans. 

443,959.00 

246,643.00 

Topeka. 

305; 024.00 
602,295.00 
3,845, 797. 00 
751,973.00 

169,457. 00 

W ichita. 

334,608. 00 

267; 686.00 
1,709,242.00 

Denver. 

2,136,553. 00 
417,762.00 

Pueblo. 

334,210.00 

Muskogee. 

4,844,442. 25 

436,000. 00 

242,222.00 

193,778.00 

Oklahoma City. 

7,883,172.09 

709,486. 00 

394.158.00 

315,326.00 
1,407,934.00 
755,440.00 

Seattle. 

35,198,357.96 
18,885,980. 26 
7,854,204. 57 
29,906,806.26 
54,679,499.16 
119,056,019.87 
13,276,773. 65 

3,167,854.00 

1,759,918.00 
944,299.00 
392,710. 00 

Spokane. 

1,699,739. 00 
706,878.00 
2,691,614.00 
4,921,156.00 

Tacoma. 

314,168.00 

Portland.*. 

1,495,340. 00 

1,196,272.00 
2,187,180.00 

Los Angeles. 

2,733,975. 00 
5,952,801.00 

San Francisco. 

10,715,044.00 
1,194 912.00 

4,762,242.00 

Salt Lake City. 

663,838. 00 

531,071.00 




Other reserve cities. 

1,945,874,457.03 

175,128,702.00 

97,293,723.00 

77,834,979.00 


All reserve cities. 

3,513,961,513.76 

316,256,536.00 

175,698,075.00 

140,558,460.00 


Maine. 

46,898,653. 28 
22,268,769.99 
19,218,246.04 
140,721,736. 97 
29,917,010.63 
69,821,700.52 

2,344,932.00 
1,113 438.00 

2,344,932.00 
1,113,438.00 

937,972.00 

New Hampshire. 

445,377.00 

384,364.00 

Vermont. 

' 960,913.00 

960,913.00 
7,036,087.00 
1,495,851.00 
3,491,085.00 

Massachusetts. 

7,036,087. 00 
1,495,851.00 
3,491,085.00 

2,814,435.00 
598,340.00 
1,396,434.00 

Rhode Island. 

Connecticut. 


New England States. 

328,846,117.43 

16,442,306. 00 

16,442,306.00 

6,576,922.00 






















































































132 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

Reserve required under II. R. 7837, based on deposits reported June 4, 1913 —Contd. 


Cities, States, and Territories. 


New York. 

New Jersey. 

Pennsylvania. 

Delaware. 

Maryland. 

District of Columbia. 

Eastern States. 

Virginia. 

West Virginia. 

North Carolina. 

South Carolina. 

Georgia. 

Florida. 

Alabama. 

Mississippi. 

Louisiana. 

Texas. 

Arkansas.. 

Kentucky. 

Tennessee. 

Southern States 


Ohio. 

Indiana. 

Illinois. 

Michigan. 

Wisconsin. 

Minnesota. 

Iowa. 

Missouri. 

Middle States. 

North Dakota. 

South Dakota. 

Nebraska. 

Kansas. 

Montana. 

Wyoming. 

Colorado. 

New Mexico. 

Oklahoma. 

Western States. 

Washington. 

Oregon. 

California. f .. 

Idaho. 

Utah. 

Nevada. 

Arizona. 

Alaska. 

Pacific States. 

Island possessions (Hawaii) 

Total States. 

Total United States.. 


Net deposits sub¬ 
ject to reserve 
requirements. 

Cash require¬ 
ment under 
H. R. 7837. 

Balance in 
reserve banks 
under H. R. 
7837. 

Optional 
under H. R. 

7837 (per 
cent cash or 
balances). 

$370,193, 609. 43 
202,574,593. 74 
475,471,735.4) 
8,513,102. 98 
40,554,108.05 
1,031,403. 06 

$18,509,681 00 
10,128, 729.00 
23,773,587. 00 
425,655. 00 
2,027,705. 00 
51,570. 00 

$18,509,681.00 
10,128,729.00 
23,773,587. 00 
425,655. 00 
2,027,705. 00 
51,570. 00 

$7,403,872.00 
4,051,492. 00 
9,509,434.00 
170,262. 00 
811,082. 00 
20,628. 00 

1,098,338,552. 67 

54,916,927.00 

54,916,927. 00 

21,966,770. 00 

93,719,750. 42 
56,160,448. 92 
32,965,737. 40 
20,201,398.31 
42,547,683. 67. 
36,918,647. 97 
37,229,745.07 
13,887,110.55 
16,644,169.34 
120,776,500. 33 
19,072,404.12 
43,465,014.17 
64,719,553.41 

4,685,987.00 
2,808,023.00 
1,648,288. 09 
1,010,069.00 
2,127,385. 00 
1,845,932. 00 
1,861,487.00 
694,356. 00 
832,208.00 
6,038,825. 00 
953,621. 00 
2,173,250. 00 
3,235,977. 00 

4,685,987. 00 
2,808,023. 00 
1,648,288. 00 
1,010,069.00 
2,127,385. 00 
1,815,932.00 
1,861,487.00 
694,356. 00 
832,208. 00 
6,038,825.00 
953,621.00 
2,173,250. 00 
3,235,977.00 

1,874,395.00 
1,123,209. 00 
659,314. 00 
404,027.00 
850,954. 00 
738,373.00 
744,594.00 
277,743.00 
332,884. 00 
2,415,531.00 
381,449.00 
869,301.00 
1,294,390. 00 

598,308,163.68 

29,915,408. 00 

29,915,408. 00 

11,966,164.00 

211,714,557.24 
127,799,890.35 
217,140,603.31 
92,318,092.81 
95,050,605.39 
109,033,507.97 
123,092,911.33 
32,575,300.80 

10,585,728.00 
6,389,995.00 
10,857,030.00 
4,615,905.00 
4,752,530.00 
5,451,675.00 
6,154,645.00 
1,628,765.00 

10,585,728.00 
6,389,995.00 
10,857,030. 00 
4,615,905.00 
4,752,530.00 
5,451,675.00 
6,154,645.00 
1,628,765.00 

4,234,292.00 
2,555,998.00 
4,342,812.00 
1,846,362.00 
1,901,011.00 
2,180,670.00 
2,461,857.00 
651,506.00 

1,008,725,469.20 

50,436,273.00 

50,436,273.00 

20,174,508.00 

34,156,079.53 
32,524,541.88 
57,484,779.56 
62,990,129. 91 
34,569,197.15 
13.135,898.01 
38,730,570.50 
15,082,617.80 
55,268,368.49 

1,707,804.00 
1,626,227.00 
2,874,239.00 
3,149,507.00 
1,728,459.00 
656,795.00 
1,936,528.00 
754,132.00 
2,763,418.00 

1,707,804.00 
1,626,227.00 
2,874,239.00 
3,149,507.00 
1,728,459.00 
656,795.00 
1,936,528.00 
754,132. 00 
2,763,418.00 

683,122.00 
650,490.00 
1,149,695.00 
1,259,803.00 
691,383.00 
262,717.00 
774,613.00 
301,652.00 
1,105,369.00 

343,942,182.83 

17,197,109.00 

17,197,109.00 

6,878,844.00 

30,235,417. 25 
29,327,686.13 
127,304,756.39 
18,842,253.16 
7,899,595.98 
6,587,718.61 
9,520,662. 66 
852,680.20 

1,511,771.00 
1,466,384.00 
6,365,238.00 
942,113.00 
394,979.00 
329,386.00 
476,033.00 
42,634.00 

1,511,771.00 
1,466,384.00 
6,365,238.00 
942,113.00 
394,979. 00 
329,386.00 
476,033.00 
42,634.00 

604, 708.00 
586,554. 00 
2,546,096.00 
376,846.00 
157,990.00 
131,754.00 
190,414.00 
17,054.00 

230,570,770.38 

11,528,538.00 

11,528,538.00 

4,611,416.00 

1,941,602. 46 

97,080.00 

97,080.00 

38,832.00 

3,610,672.858.00 

7,124,634,372.00 

180,533,642.00 
496,790,179.00 

180,533,642.00 

356,231,717.00 

72,213,457.00 
212,771,917.00 

























































































VIEWS OF THE MINORITY. 


The undersigned regret that when the Committee on Banking and 
Currency met finally to consider IT R. 7837 they found the majority 
members of the committee so bound by their caucus action that they 
could not consider amendments to the bill which, if adopted, would 
have eliminated its unsound and questionable provisions. 

Sush changes, while comparatively few in number, in our opinion 
are fundamental and vital. The majority members of the committee 
refused to favorably consider them on the ground that they involved 
matters of Democratic party policy settled by the caucus. 

COMPULSORY PURCHASE OF STOCK. 

One objection to the proposed law goes to the provision which 
compels national banks to subscribe for the capital stock of the Fed¬ 
eral reserve banks on pain of forfeiture of their charters. We be¬ 
lieve this forfeiture provision is of doubtful constitutionality and 
wholly unnecessary and inexpedient. If the plan proposed by the 
bill proves to be a good one, the mercantile, manufacturing, and agri¬ 
cultural interests of the country, which control the banks, can be 
depended upon to appreciate its advantages, and the banks will nat¬ 
urally and voluntarily join in trying to make it a success. At least 
time enough should be allowed for a gradual and natural develop¬ 
ment to fully demonstrate that the new system is a success before 
force should be applied, by way of quasi penal or forfeiture pro¬ 
visions, to compel reluctant banks to come into it. 

If, on the other hand, the plan proposed by the bill should prove 
to be too cumbersome or not workable, the tying up of so vast a 
quantity of the reserves as the bill proposes to compel would cause 
the borrowing public great hardship, and the vast business inter¬ 
ests of the country would be imperiled. Should the national banks 
of the country, or a large majority of them, elect to forfeit their 
present charters rather than come into the new system, our currency 
supply would be greatly curtailed, all business would be disastrously 
affected, and our national banking system would be destroyed. 

FEDERAL RESERVE NOTES. 

Another fundamental objection is to the provision (p. 28, line 19) 
that the notes to be issued to or through the Federal reserve banks 
“shall be obligations of the United States.” Section 17, in which 
this provision is found, practically creates a Government central bank 
or board of issue, which may issue notes on application without 
limit at its discretion for the sole accommodation of the banks and 

133 



134 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


not to meet the necessities of the Government. In times of serious 
crises the Government obligation to pay these notes might, and 
probably would, lead to very serious complications involving the 
credit of the Government, as the history of all such experiments 
amply proves. 


FEDERAL RESERVE BOARD. 

The powers of the Federal reserve board are, in our judgment, too 
great. This board should be given supervision, but not actual man¬ 
agement of the banking business of the country. We also believe that 
while an effort has been made to make the board somewhat non¬ 
partisan, there is still great danger as the bill is now drawn that the 
banking business of the country may be used for partisan political 
advantage. Every possible provision should be incorporated to 
prevent a result which every right thinking man would greatly 
deplore. Those who will most suffer from political management of 
this board will be the small merchant and the borrowing public. 
There is also a clear impropriety in allowing the Comptroller of the 
Currency, who is charged with the supervision and administration of 
the whole national banking system, to serve on this board. 

There are other imperfections in the bill which will be pointed out 
during its consideration on the floor of the House. 

E. A. Hayes. 

Frank E. Guernsey. 

James F. Burke. 

Frank P. Woods. 

Edmund Platt. 


Mr. Lindbergh submitted the following 

MINORITY VIEWS. 

The Glass Bill, H. R. 7837. 

The Glass bill, as drafted, is merely a new form for the admin¬ 
istration of a false old system. It leaves the worst of all features 
in the present financial scheme unchanged; that is, the burden of 
excessive interest. It provides upon its face for a financial strin¬ 
gency and possible panic in its inception as a result of the forced 
shifting of cash and resultant transfer, and therefore a disturbance 
of credit. After the shift would be made and the adjustment was 
finally completed, with the exception of a provision for the issue 
of asset currency, it would be an improvement over the present 
method of finances. The disadvantage that would arise by shifting 
of cash balances and early disturbance of credits may be remedied 
by simple amendments. 

The most disappointing thing about the bill is that it provides 
no relief from existing economic evils. That relief is due to begin 
with an improved money system. The Glass bill proposes to incor¬ 
porate, canonize, and sanctify a private monopoly of the money 
and credit of the Nation—to remove all the people’s money from 
the United States Treasury and place it in the vaults of the banks 
to be used by them for private gain. It violates every principle 
of popular, democratic, representative Government and every 
declaration of the Democratic Party and platform pledges from 
Thomas Jefferson down to the beginning of this Congress. 

Those of the committee who favor the bill have worked diligently 
with earnestness and ability to modify the details in dealing with 
finances, but have done nothing to correct the grossly false basis 
on which finance is now operated; that is, the fact that financing in 
the present way is a burden instead of an assistance to trade and com¬ 
merce. Severe as my criticism of the bill may seem, still I believe 
that with some few amendments the system that the Glass bill 
would put into operation would be less severe on the people than 
our present system. I do not object to it because of unfavorable 
comparison with that now practiced, but base my objections on the 
ground that now, while we are at it, we should instead pass a good 
bill. 

In submitting a minority report I have two purposes in view: 

(a) To offer suggestions for amendments in the Glass bill that would 
make it simple, more responsive, and less expensive to operate; 

(b) to offer a new bill to form the basis for an American financial 
policy to place public and private enterprise, industry, and exchanges 
upon a sound economic basis and destroy the power of private 
operators to monopolize the mediums of exchange. 

Those who are responsible for the draft of the Glass bill undoubtedly 
hope through its enactment to remove from finance the frequent 

135 


136 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


stringencies and occasional panics that develop. The plan they 
offer, once it became operative and adjusted to, would probably 
remove some of the danger elements that in the past have driven 
the country mto frequent money stringencies and occasional panics; 
but as an effective remedy it is inadequate. The very basis of the 
system that is sought to be patched is false. 

The Glass bill would make a change in the administration of the 
present system, but no change in the money basis. The design of the 
bill is to lessen the immoderate and violent fluctuations that result 
from the present method of financing. For that reason a Member 
who does not consider the bill satisfactory may vote for it nevertheless. 
We should first do all we can to secure the enactment of a good bill. 
This is not a good bill, but with a few amendments it may be better 
than no bill. 

Business is now operated under a highly technical credit system 
based on a small amount of lawful money. Twenty-five and possibly 
more dollars of credit exchanges, on the average, for each dollar of 
actual cash paid, but credit as a rule is directly related to the location 
of actual money. It is through the banks that most of the credit 
extensions occur. The cash is in reserve for the final balances. Com¬ 
paratively little of the cash in the banks moves at all. It lies in the 
vaults year after year without going out on any mission of business. 

This bill proposes to shift a very considerable part of the bank cash. 
It would require several months at the very least to adjust credits to 
the shift. The volume of credit would be disturbed to a very much 
greater extent than the shift of cash. Business would be disturbed 
by the change unless provision were made to keep credit from being 
interfered with. 

The general public gets no direct condition with the Glass bill for 
purposes of securing either credit or cash. The public will still be 
forced to go to the banks. Therefore if the bill is to become operative, 
the banks will have to come under it. The national banks would 
only be compelled to do so, but if they alone do, it will hardly be 
satisfactory, because they do only about one-third of the banking 
business. 


SOME ACTUAL CONDITIONS TO BE MET. 

On April 4, 1913, the deposits held by national banks required 
them to hold a reserve of $891,794,905. They were $15,691,784 
short—below the reserve requirements. If they had been compelled 
to subscribe for Federal reserve bank stock under those conditions, 
what would have happened? Their capital stock was approxi¬ 
mately $1,050,000,000, which would have required them to pay 
$105,000,000 for stock within 60 days. This sum would be transferred 
to an entirely new field of financial development. In addition to 
that, under the law they would have been required to make good the 
$15,691,784 shortage in reserve within 30 days; an old provision 
which is carried into this bill. The State banks were practically in 
the same condition, and if they, too, came in, as the bill contemplates, 
the demand for ready money would have exceeded $200,000,000 for 
Federal reserve bank stock alone, and a much greater shift of de¬ 
posits would be required. All things considered, it is not improbable 
that a shift of near half a billion dollars would have to be made. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 137 


A MONEY STRINGENCY AND POSSIBLE PANIC. 

The contraction which would come about in making such a change— 
that is, in the shifting of cash from its old moorings and the still greater 
credit disturbance—would result seriously and bring about a great loss 
to the people. A statement of some actual facts will illustrate suffi¬ 
ciently. In a general way the results would be the same from an 
analysis of any bank report made in the last 10 years, but to be 
specific I take the banks’ reports to the Comptroller of the Currency 
September 4, 1912. I call attention merely to a single bank in each 
of the States having a representative on the Banking and Currency 
Committee. I show the capital stock, the amount it would have to 
pay under this bill, and the actual lawful money contained in its 
vaults, as follows: 



Capital. 

Assess¬ 

ment. 

Money in 
bank. 

Barnesville National Bank, Minnesota. 

$25,000 
50,000 
25,000 
25,000 
50,000 
50,000 
100,000 
100,000 
100,000 
25,000 

$2,500 

5,000 

2,500 

$2,514 

3,931 

1,287 

Peoples’ National Bank, Virginia. 

Whitland National Bank, Indiana. 

People’s National Bank, Rollesburg, W. Va. 

2,500 

1,536 

First National Bank, Hudson, Ohio. 

5 ; 000 

5,000 
10,000 
10,000 
10,000 
2,500 

3,657 

First National Bank, Almena, Kans. 

2, 856 
7,798 
6,582 
6,637 
1,688 

Irving National Bank, Irving Park, Ill. 

Athol National Bank, Athol, Mass. 

Omnmanf'hfl National Bank, Cnmmanehe. ’l ex . 

First National Bank, Perry, Ark. 

First National Bank, Wellington, Colo. 

25,000 
1,000,000 
25,000 
150,000 
50,000 
50,000 

2,500 

1,203 

80,826 

1,503 

Heard National Bank, Jacksonville, Fla. 

100,000 
2,500 

First National Bank, Alex, Okla. 

Oaffney National Bank, Sonth Carolina. 

15,000 

5,000 

5,000 

9,725 

First National Bank, Vacaville. Cal. 

3,501 

Union National Bank, Brunswick, Me. 

4,288 

Grange National Bank, Chester, Pa. 

100,000 
40,000 
100,000 

10,000 
4.000 

9,112 

Farmers & Mechanics’ National Bank, Jefferson, Iowa. 

1,877 

First National Bank, Baldwinsville, N. Y. 

10,000 

8,225 



These responsible banks, on the date named, did not have sufficient 
lawful money in their vaults to meet the requirements of the Glass 
bill. Many of the banks have more cash than is necessary, but the 
banks listed above are not isolated cases. Substantially the same 
condition exists in all the States. Hundreds and hundreds of banks 
would be required to pay out, within 60 days after the organization 
commenced, all the cash in their vaults, and many more of them 
would have barely enough. In the aggregate they would not have 
enough. 

Instancing this condition, in South Carolina there were 46 national 
banks on September 4, 1912. On that date 6 of them did not have 
enough lawful money in their vaults to pay for the stock they would 
be compelled to take. What would happen under such conditions? 
These banks would, of course, draw on their reserve banks for the 
money due from them. Simultaneously the reserve banks would be 
called on to return to the other banks their reserves and pay for 
Federal reserve bank stock. 

Let us take the National City Bank of New York as an example. 
It is a central reserve bank, required by law to keep 25 per cent 
lawful money reserve. On September 4, 1912, its deposits were 
$239,669,430. It required a legal reserve of $59,917,357, but it had 
only $48,364,892 lawful money "in its vaults. It was owing to other 































138 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


banks, included in the $239,669,430, approximately $100,000,000. 
These banks, under the operation of the bill, would be compelled to 
draw on the National City Bank for money to pay subscriptions for 
Federal reserve bank stock, and also to cover in these banks within 
60 days a 3 per cent reserve. The country banks do not, as a rule, 
carry more reserve cash in their vaults than the law requires and 
could not draw directly from their vaults. In addition to that, the 
National City Bank would be required to pay $2,500,000 for capital 
stock. The statement of September 4 shows that the National City 
Bank had not sufficient lawful money to meet any such demand. It 
may be suggested that it had $38,296,647 checks and exchanges out¬ 
standing; but, admitting that, and that these come in rapidly, as 
many more are put out in the regular course of business. The com¬ 
merce of the country demands transmission through the mails, 
express, and in clearance agencies enormous sums. Under the terms 
of the bill this one bank would probably be compelled to transfer 
more than $100,000,000. I do not plead for that bank. Its stock¬ 
holders have fleeced the people of this country, but what applies to 
the demands that are to be made on that bank applies to the demands 
that would be made on banks generally in the proportion of their 
business. A scramble would take place among the banks to get in 
shape to meet their obligations. Naturally they would demand pay¬ 
ment of the borrowers. A stringency would result, and possibly a 
panic. In such an emergency the borrowing people would suffer, 
because they are absolutely tied to the banks, and the Glass bill 
would make no change in that respect. If everybody would remain 
perfectly calm and make no demand for impossible things, the shift 
could be made under the stress without an actual panic. 

COMPENSATING PROVISIONS TO THE BANKS. 

There are some compensating provisions in the Glass bill that 
would aid the banks in changing from the present system to the 
proposed system, provided that no excitement would arise until they 
were made effective. The Federal reserve board may suspend for 
30 days, and renew the suspension for periods of 15 days, any and 
every reserve requirement contained in the bill. Aid would also be 
given to the banks by a deposit of all the funds in the Government 
Treasury. Still further aid might be provided by a loan of United 
States currency. But the organization would have to be complete 
before that could be loaned. Much loss might occur in the mean¬ 
time. 

It is claimed by this bill to give considerable control and manage¬ 
ment of the banks to the Government, but it reserves no . power in 
the Government to aid those who need money to do business with. 
Those who actually use the money to carry on business are com¬ 
pelled to go to those who use money simply for the purpose of charg¬ 
ing a profit out of handling it. That is, the banks and money loaners 
make a profit out of those who use money. The latter have no other 
purpose whatever. This bill makes the bankers the “go-between” 
between the Government and those who use money only as a means 
to deal in the material and social exchanges that are essential to 
civilization, the only true purpose of money. This bill provides for 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 189 


the continuation of an actual extortion fostered by the Government 
against the freedom of business intercourse among the people. It 
recognizes the superior sovereignty of the embodied institutions of 
money oyer any power of government, so that neither the Govern¬ 
ment in its sovereign capacity nor the people, or their representa¬ 
tives, can initiate the placement of one dollar of monetary function 
into actual exchanges among the people, except through the agency 
of organized money loaners with purely selfish interests. The Glass 
bill positively abolishes the United States Treasury and the public 
money of the people, and substitutes the so-called Federal reserve 
banks, which by the terms of the bill are to be the exclusive stock of 
the bankers. It reduces the people’s Treasury Department and the 
Bureau of Printing and Engraving to the position of a job printing 
house for the private use of the bankers. 

It is an advantage to the banks to have the Government print and 
engrave the money, so long as the banks may have a monopoly of its 
distribution. This bill continues and affirmatively gives them that 
monopoly. They have held it for a long time in the past, and now 
Congress is about to bow its subserviency in more positive express 
terms of a statute than heretofore. Ask, Where will the people go to 
borrow money after this bill goes into effect? Congress has been 
slipped into the halter by the money lenders, and they seem to have 
supplied themselves with a double hold—a chain in addition to the 
strap. 

Those who wish to use money for the purpose of its service to a 
freedom of trade by the people among themselves find no Govern¬ 
ment-supported source of supply except the exclusive monopoly 
granted to the banks. These banks have the means and do compel 
the people to pay for the use of money a rate of interest that forces 
the majority of mankind into needy circumstances, and deprives all 
but a few of a proper compensation for their lives’ efforts. No one 
should assume because of all this, and because the bankers get the 
lion’s share of profits, that bankers are disposed to be vicious. We 
should change the system and not blame the bankers. In the process 
of changing the system the people should address themselves first to 
a subservient Congress. 

The Glass bill, being distinctively a banker’s bill, and all who are 
not bankers being compelled to go to the banks for accommodations, 
we should at least make it easy for the banker to help borrowers 
whenever he is willing. If this bill is passed without some minor 
amendments, to make the transfer from the old to the new system 
easy, the bankers will be compelled to retrench until they can adjust 
to this new system. They will not only be compelled to withhold 
further credit during that period, but many borrowers will be called 
on to pay notes while the adjustment is going on. For that reason, 
if the general plan of the bill is to be adopted, some amendments can 
and should be made to obviate the tendency to create a stringency. 
The banks will not wait for help, but will help themselves by calling 
on borrowers to pay. It evidently is the opinion of those who favor 
the bill that the Federal Reserve Board will waive the affirmative 
requirements to enable bankers to shift from the old to the new 
system without disturbance. Admitting that the board would do 
so is not sufficient to the business world. Bankers are cautious 


140 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


business men and will resolve all doubts in favor of safety and there¬ 
fore call in loans until they are prepared to meet the most difficult 
provisions of the bill. The bill should be made right to start with 
so far as human foresight can make it and still have the saving 
clauses to meet any oversight. 

FEDERAL RESERVE BANK STOCK ASSESSMENT. 

Instead of making a call for 5 per cent instanter and 5 per cent 
within 60 days, it should be made in several smaller calls distributed 
over a period of a year. There is, however, no need of so much cen¬ 
tralized capital as would occur in these banks. The security of 
the depositors in a bank depends on the good management more 
than on the amount of its capital stock. The funds in the control 
of a good management in a bank are usually several times greater 
than its capital. A 5 per cent assessment on the capital and surplus 
for the establishment of the Federal reserve banks would serve the 
country better than a larger assessment upon the capital alone. 
I believe that 3 per cent on the combined capital and surplus would 
be still better, because that would leave more money for use in the 
proximity of its origin, where it belongs. 

ASSESS COMBINED CAPITAL AND SURPLUS. 

Assessments should be made both on the capital and surplus. The 
surplus of a bank is as much a part of its capital as the capital itself is. 
It would be an injustice to the smaller banks unless the assessment is 
made on both capital and surplus. The 37 national banks in New 
York City, for example, had September 4, 1912, a capital of 
$120,200,000 and a surplus of $128,255,000, while taking, for instance, 
the first 37 banks listed in Minnesota, which is a fair average for coun¬ 
try banks generally, their aggregate capital on the same date was 
$1,425,000 and their surplus $458,615. Now, if this new system is to 
be a protection to the banks or if it is to be a burden to them, in either 
case, let them pay for the one or the other in a proper proportion. 
The bill should be amended to have the assessment made on the capital 
and surplus both. 


BANK RESERVES. 

The reserve requirements should be reduced immediately to 20 per 
cent for all reserve banks. That would help the banks to meet the 
demands of the country banks for a return ol their funds. As the bill 
is, the reserve banks would simultaneously be compelled to press col¬ 
lections—first, in order to meet the demands from the country banks 
for their reserves; second, to subscribe for stock in Federal*reserve 
banks; and, third, to transfer a part of their own reserves to the lat¬ 
ter. The period of adjustment should be more graduated and the 
reserve requirements reduced. Since the banks have absolute control 
of the distribution of money to borrowers, they should not be pre¬ 
vented from loaning at times and in places when and where the money 
is needed. The formative period of adjustment to the requirements 
of this bill would prevent that unless amendments are made. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 141 


CAPITAL CAN NOT BE SIMULTANEOUSLY PROVIDED FOR 12 FEDERAL 

RESERVE BANKS, WHICH MIGHT RESULT IN THERE BECOMING ONE 

CENTRAL BANK. 

On page 3 the Glass bill provides for not less than 12 Federal 
reserve banks with capital equal to 20 per cent of the capital stock of 
the banks subscribing, and for one-fourth to be paid in cash, and also 
that no Federal reserve bank shall begin business until $5,000,000 has 
been paid in. Since the Federal reserve banks would be started by 
the national banks alone, as they alone would be forced to join, they, 
with an aggregate capital stock of less than $1,100,000,000, even if 
they should all join, could not start 12 Federal reserve banks on a 5 
per cent assessment with each a paid-in capital of $5,000,000, as the 
bill requires. Furthermore, it would be impossible to equalize to 
approximately equal the capital in all districts. It is necessary, 
therefore, to amend on page 3. The bill would serve the country 
better by making the stock of the Federal reserve banks equal to 3 
per cent of the unimpaired combined capital stock and surplus of the 
subscribing banks and permit them to begin business when $1,000,000 
is paid in. Under the provisions of the bill the Federal reserve 
board may name the 12 Federal reserve districts, and the cities for 
their banks. The city of New York should and of course would be 
named as one of the 12. Chicago would be another. The influence 
of the moneyed interests could easily prevent all of the districts 
except New York City from completing the organization unless the 
provision forcing banks to become members is held constitutional, 
which is somewhat questionable. The larger banks would have to 
join in order to have capital enough for 12 reserve banks. The 
larger banks are controlled by stockholders who support the Wall 
Street system. Anyone who has investigated the influence of that 
system knows that its influence in a case of this kind would be all 
powerful. The New York district under that condition might com¬ 
plete its organization and the rest drop out by default. Then there 
would be one central bank controlled by Wall Street stockholders. 
The Federal reserve board would have some influence, but not 
sufficient to help the general public out of the difficulty that would 
arise from such a condition. It is not within the power of the 
Federal reserve board to complete a single organization if the banks 
do not affirmatively act. 

INCREASE AND DECREASE OF CAPITAL STOCK. 

Sections 5 and 6 provide that when banks reduce their capital, or 
dissolve, or become insolvent, the Federal reserve bank shall pay 
therefor a sum equal to their cash paid subscriptions on shares sur¬ 
rendered. In times of panic or financial stress this provision would 
weaken the Federal reserve banks. The banks holding the stock 
could dissolve, reduce their capital stock, or go into insolvency, thus 
not only avoiding the whole or a part of the responsibility to carry 
the Federal reserve banks through financial storms, but actually there¬ 
by reenforce their individual holdings by reducing those of the Federal 
reserve banks. This should be so amended that payment for shares 
surrendered would be made at such time as the Federal reserve 


142 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

board from time to time provides. No solvent bank should be per¬ 
mitted to surrender its stock at a period when in the opinion of the 
Federal reserve board the general public interests, on account of 
financial stringency, require the Federal reserve banks to have all 
their resources available to meet the more general demand. 

SMALL BANKS SHOULD BE ADMITTED. 

The second paragraph of section 10 should be amended so as to 

E rovide that no bank should be excluded from becoming a member 
ank of a Federal reserve bank because of the amount of its capital 
stock, so long as its capital stock and surplus remained unimpaired, 
if in every other respect such bank was qualified. The welfare of the 
whole people requires the thrift of every community. The small 
communities are as essential as the large ones, and their banks should 
receive the same treatment as those of the larger cities. 

FOREIGN AGENCIES. 

The last paragraph of section 15 should be amended so as to pre¬ 
vent instead of permit Federal reserve banks opening accounts or 
establishing agencies in foreign countries. Since it is proposed by 
this bill to turn over to the Federal reserve banks the Nation’s funds, 
we should not entangle them further by permitting the Federal re¬ 
serve banks to establish agencies in foreign countries for speculation. 
The foreign banks authorized by section 28 of the Glass bill would 
attend to foreign business. 

GOVERNMENT DEPOSITS. 

It may be questionable whether it is constitutional to deposit Gov¬ 
ernment funds in the banks, except in consequence of appropriations 
made by law. Funds that have not been appropriated must remain 
in the Treasury. Subdivision 7 of section 9, article 1, reads: 

No money shall be drawn from the Treasury but in consequence of appropriations 
made by law; and a regular statement and account of the receipts and expenditures 
of all public money shall be published from time to time. 

It may be that any funds that have actually been appropriated can 
legally be deposited in the banks. However, passing that question, 
the adoption of a policy to continually keep on deposit all the public 
funds in the banks is at least doubtful. The bankers claim that the 
money is being taken out of business to pay the Government demands 
and should be deposited in the banks in order to pass back into busi¬ 
ness. If its doing so were confined to legitimate business, and did not 
enter into speculating and gambling, there would be more virtue in 
the claim. 

A concrete illustration exists at the present time to show the effect 
of the use of the public funds. The first $10,000,000 that the present 
Secretary of the Treasury deposited in the summer (1913) in the 
banks on 2 per cent interest basis, probably did no good, because it was 
immediately absorbed by Wall Street and used to exploit the people. 
The bank statements show that it quickly gravitated to Wall Street. 
I do not make the statement in criticism of the Secretary. It did not 
happen to be a good time to make the deposit. On the other hand, 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 143 

the later and larger deposits being made by the Secretary of the 
Treasury in the banks in the South and West come at an opportune 
time. It will help to move the crops and to steady conditions and 
prevent financial stringency. 

The undesirability of keeping all the public funds on deposit in the 
banks all the time is, I think, manifest. At certain periods there is a 
great demand for money to move crops. When crops have been 
moved the demand for money weakens and it piles up in the banks. 
The banks loan it out then at lower rates of interest. The speculators 
have taken advantage of those conditions in the past years to reduce 
the price of farm products when the farmers sell their crops. They 
hold the money tight then, but when the farmers buy what they 
require the speculators would have the money market easy so as to 
make the farmers pay high prices. In that way the speculators have 
practically fixed prices. When the farmer sells he is compelled to 
take the price the speculator offers; when the farmer buys he gives 
the price the speculator demands. That is one of the troubles with 
the present system and this Glass bill does not furnish a sufficient 
remedy. 

If the banks are given all the public funds at all times, as the Glass 
bill provides, there will be times when they will not be in demand for 
legitimate commercial business. They will then be loaned to the 
speculators, who will exploit the people. Then when the demands of 
legitimate trade come again the money market will become tight. 
The farmer, the merchant, the manufacturer, and others will be com¬ 
pelled to compete with the speculators to borrow money. The interest 
rates will be raised. There will be no place then to give relief like 
that at the present time being extended to some sections of the 
country by the Secretary of the Treasury. The discovery that such 
relief can be given has come too late, for we will hardly have more 
than a sample of its effect until the Glass bill will become a law and 
will take the public funds and place them where they will be available 
to speculators in competition with legitimate commerce. It may be 
contended by those favoring the bill, that the banks can secure 
Government note issues at any time they wish. That is true if the 
Federal reserve board would approve, as very likely it would if the 
public interest required, but that is a protection available to the 
banks alone. They may apply if they wish, but neither the Federal 
reserve board nor the public at large could force such an application 
to be made. The banks are in the business solely for profit. It is 
for their interest to keep the rates of interest as high as they can, and 
it will make no difference how much the public may be in need of 
more money, the banks will make no application for Government 
note issues till sucti time as the public is willing to pay a larger profit 
than the banks can make without. The banks can bring out the note 
issues if they wish but no one else can. 

NOTE ISSUES MADE ASSET CURRENCY. 

For more than a half century the money loaners have ridiculed the 
issue of United States currency based on the credit of all the people. 
Now they ask the United States to issue notes on the credit of the 
people, but not for the people, nor in their interest. Instead it is 
proposed to organize the private banks into 12 or more special cor- 


144 OHANGES IN THE BANKING AND CURRENCY SYSTEM. 

porations and issue this currency on the security of notes, bills of 
exchange, acceptances, Government, State, and municipal bonds. In 
other words, it is to be a form of asset currency supported by the Gov¬ 
ernment but given to special interests to be vested by Congress with 
full and complete authority to scalp from the people and generally 
exploit them. 

By section 7 in this bill the Government is to divide the profits 
that the Federal reserve banks get out of the people; that is, the 
Government is to print and engrave currency for these private cor¬ 
porations and give them the monopoly of loaning it, and whatever 
they are able to force the people to pay for the use of it such proceeds, 
after the corporations have first taken out the expenses and 5 per cent 
profit for themselves, the excess will be divided between these copora- 
tions and the Government. Considering section 7 in connection with 
the note issues which the Government is supposed to charge for, and 
also in connection with the charge to be made upon Government 
deposits, this section 7 establishes a vicious principle. Upon the 
note issue as well as the Government deposits, the policy of making 
a reasonable charge, can not be reasonably questioned. That is 
clearly within the Government right as well as a fair policy, but this 
section goes further, and provides that after the special private 
corporations to which Government note issues and Government 
deposits have been furnished and a proper charge made, that after 
these corporations have gotten out of the people a reasonable return, 
that is 5 per cent as fixed by the bill, then whatever in addition to 
that that can be extorted from the people the Government will 
divide with the banks. 

No one other consideration in connection with the business dealings 
of the people with each other is so important as the money and 
credit system. The authority for the money, as well as the support 
of credit, depends for its stability on the Government. In the ex¬ 
tension of the advantages sought to be derived from the use of 
money and a practical use of credit the power of the Government 
is absolutely essential. Any proper considerations by Congress of 
this subject are necessarily national in their scope. 

It is the acme of absurdity for Congress to place between the 
people and the Government itself an agency in the absolute control 
of the distribution of money and the use of credit that would be 
valueless without the guaranty of the Government, and yet that is 
the identical thing that has been done by Congress, and the Glass 
bill emphasizes the absurdity. 

Why should Congress place a controlling agency, employed for pri¬ 
vate gain, between the people and the Government of the United 
States? That is what has been done by giving to the banks the 
exclusive privilege of the use of the Government credit. Why is it 
proposed that the banker should take the merchants’, the manufac¬ 
turers’, and others’ notes, as well as the bonds of towns, villages, 
cities, States, and even the Nation’s bonds, to the Government and 
get currency, and at the same time refuse the producers themselves, 
the makers of those notes and obligations, an equal privilege? The 
absurdity of the Government giving away its own credit to corpora¬ 
tions to exploit the people is incomprehensible. The bankers are not 
to blame. Congress is to blame for giving away the people’s rights 
and bestowing them upon the banks. 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 145 

It is true that Congress possesses the authority and has the power 
to strip the banks of their exclusive monopoly, but the most of us 
have not the courage, and therefore we have the absurdity of the 
Congress of the United States giving to special interests the Govern¬ 
ment credit—the credit of the people—thereby forcing the people to 
borrow at exorbitant rates of interest the very money that their own 
Government issues on their own credit. The fiat of the Government 
is stamped upon the coins and the currency and then given to special 
interests and used as a means to pauperize the people. If the exclu¬ 
sive privilege were not given to the banks, then they would become 
the people’s natural agents, but with the exclusive monopoly they 
become the people’s masters. 

The notes, bills of exchange, acceptances, bonds, etc., are the lim¬ 
ited currency of those giving them—limited in its circulation by the 
credit that one or more persons are willing to give to it. By this 
Glass bill it is proposed to give the credit of the Government to these 
and create an endless chain by means of which the Government is 
to manufacture asset currency for the banks. 

GOVERNMENT FURNISHES CAPITAL. 

The Glass bill proposes to deposit all the Government funds in the 
banks. In the past the funds have been approximately $250,000,000 
and the sum increases with the growth of Government business. Of 
this first sum of the people’s own money to be taken from the United 
States Treasury the banks may loan to the people two-thirds and 
keep one-third on reserve. They will get the people’s notes, bonds, 
etc., for approximately $165,000,000. Then, under section 17 of the 
Glass bill, they will be allowed to take these notes and bonds to the 
United States and deposit them and get United States currency. 
This currency they will take out and loan to the people and get an 
additional supply of notes and bonds. In the meantime they will 
have collected a lot of interest on the first installment, and, with that 
reloaned to the people, they take all the notes and bonds they get 
and come back to the United States Treasury for another supply of 
United States currency, and, as previously, they run out again and 
reldan that currency to the people, and now again they have still 
more interest collected from the people which they will have reloaned, 
so they add that and come back to the United States for still another 
supply of currency. If it were only the Treasury funds they were 
to have it would be hampered some by the reserve required to be 
back of the note issues, but they also get the deposits from member 
banks and can do the same with those. 

Thus we see that the specially created interests which the Glass bill 
proposes to make will get the funds in the United States Treasury 
and a large part of the individual deposits of the people, loan them out 
to their owners, the people, get the people’s notes and bonds drawing 
interest, and keep returning over and over, again and again, for United 
States currency to loan. Thus it is to continue ‘'world without end,” 
the people encumbered without end. It is to be a never-ending 
pulley, with boxes attached, leading from the banks into the Treasury 
of the United States, taking into the boxes the people’s money, bring¬ 
ing it out from the Treasury of the people and into the banks, to be 

8829°—H. Rept. 69, 63-1-10 


146 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


loaned to the people themselves at a price to be in the exclusive con¬ 
trol of the banks. The Glass bill proposes to protect the individual 
bank that rediscounts with the Federal reserve from exorbitant 
interest rates, but none but member banks can apply and the bill gives 
no individual borrower any protection as against an unreasonable 
charge of interest by the bank. 

In accordance with the legislative and executive policy, and upheld 
by judicial decrees, running through their official acts, to be found in 
statutes, department orders, and judicial decrees, the people have 
been given into bondage. In less than 100 years the expense of 
administering the investment of the money that this Glass bill alone 
authorizes to be taken by the banks out of the United States Treasury, 
plus the compounding of interest, at the rates that banks charge and 
collect from the people, would absorb the equal of every dollar’s worth 
of property now in existence and still leave a deficiency on which to 
declare the people bankrupt. I challenge any honest person to com¬ 
pute the cost to the people. If he does, he must admit the truth of the 
statement. A somewhat similar process to that which this bill makes 
possible for the pyramiding of loans from the use of currency author¬ 
ized to be given to the banks has existed for a long time by the use of 
deposits and credits for loans based on bank accounts, and we are paying 
now in the high cost of living partly because of that practice. A vast 
majority of the people have no property, but live from hand to mouth 
on the little part they get from the results of their daily toil. The 
rest is absorbed to pay the toll that the Government practically pro¬ 
vides for the banking and other special interests. 

THE ABSORBING POWER OF INDIVIDUAL FORTUNES. 

By reason of the policy followed by the legislative and executive 
departments, and supported by the judicial, there are several indi¬ 
viduals in these United States, each of whose fortunes are now large 
enough so that 6 per cent annual interest compounded as is the cus¬ 
tom, computed for 100 years, would furnish the owners with all the 
luxuries and extravagances of life, such as the families of the wealthy 
usually indulge, and in addition enable them and their successors to 
their fortunes to absorb the equal of the whole wealth now existing 
in this country. There are more than a thousand others who in 
twos, threes, fours, fives, and sixes could do the sam^ thing. They 
are aU levying a tax, burden, or whatever you wish to call it on us 
every day of our lives. 

It is a fact that any and all the legislation that has been advocated 
by the political leaders will have mighty little influence in solving the 
cost of living. It is not in the tariff bill, nor is it in the currency bill. 
It will not come out of a bill that comes out of secret meetings and 
closed caucuses. There can be only one purpose for doors being 
closed to the public, and that is to whip subservient Members into 
supporting something that does not give the people that to which 
they are really entitled. This Glass bill is an example of that. Those 
who provide us with bread and butter and with the clothes that we 
put on our backs and the shelter for our bodies are the last to be 
served. These, who are the source and very basis for the supply of 
life’s necessities, are deferred to a future period, while the Glass bill 
that we are called on to enact continues the system which gives to 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 147 

special interests a monopoly control of the distribution of money. 
Those who toil must support it, and must appeal to these special 
interests and pay them the toll for its use, with not one word in the 
entire bill placing a limit on that toll. 

It is generally pretended that the reason the money supply is out 
of proper commercial adjustment at certain periods is because of the 
extra demand for the movement of the crops. It is true that there 
is a farmer’s demand, but the trouble with the reformers is that they 
do not intend to give the farmers the remedy. The farmer is put off 
till the last. His rural credit system can wait. The speculating 
interests are to be first supplied with funds to speculate on the farm¬ 
ers’ products. This bill, in one of its sections, is expressly against 
the farmer. It offers a sop in section 26 by permitting the national 
banks to loan on improved farms for nine months, which would be of 
little if any value to a farmer. The farmer, unless in desperate 
straits, would be foolish to mortgage his farm for so short a period, 
but section 17 of the bill discredits the farmer’s note by refusing to 
permit it to be used as security for United States currency, but allows 
most other kinds of paper to be taken. There is nothing better than 
a note secured by a farm mortgage. Farm-mortgage notes should be 
accepted the same as merchants’ notes and others when they have 
the same period to run before maturity. A large amount of farm- 
mortgage notes are coming due within 60 and 120 days all the time; 
that is, a farm mortgage, after it has run to within a period of 60 or 
120 days of maturity, it makes no difference how long it was made for 
originally, even if 10 years, is as good as any other short-time note, 
and the bill should be amended to take such notes. 

While I regret it, I am not surprised that the President might advo¬ 
cate a bill that he could not possibly have had time to study, for his 
multifarious duties make it impossible for him to give detail study 
to these matters, but Members of Congress have time and are not 
excusable for submitting a bill so weak in its value to the public. It 
may be better than what we have now in practice, but the people are 
entitled to a bill worth 100 cents on the dollar. 

Various other amendments of lesser importance could be made to 
the Glass bill, improving it, to which I shall not call attention in this 
report, rather leaving them to be considered on the floor of the House. 
In suggesting the amendments that I have, it is not with the inten¬ 
tion of approving the bill even if the amendments are adopted. The 
amendments would improve the bill, and with them in I could vote 
for the bill when all things possible had first been done to adopt a 
good bill. 

The Glass bill is unfitted to an adjustment of the greatest financial 
problems that now confront the people for solution. If it were to be 
amended so as to meet the necessities of the present times, even the 
title would have to be stricken out, another substituted, all the 
sections rewritten, and there would be nothing left to resemble the 
original. 

NEW LEGISLATION AND NOT PATCHWORK IS NEEDED. 

Congress was called into extra session to legislate with a view to 
reduce the cost of living. All honest people must commend the pur¬ 
pose. Earnest efforts have been and still are being made to accom- 


148 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

plish that result, but on account of peculiar partisan practices and 
false rules for the government of Congress, for which men and not 
parties are at fault, Congress does not have presented to it in form to 
vote on measures suited to the people’s most urgent needs. Secret 
committee meetings and secret caucuses frame bills, bind and gag the 
attending members, and by a system of evading record votes on sep¬ 
arate important provisions, prevent the passage of legislation that 
would result in a substantial reduction of the cost of living. 

Unless some sudden change takes place in the government of Con¬ 
gress, that is not apparent at this time, nothing that is here being done 
will reduce materially the cost of living to those who earn it by their 
daily work. The reason why may be easily understood by anyone 
who will carefully study the conditions. Such a study will reveal to 
anyone the leading cause for the high cost of living. When one under¬ 
stands those, he will know that the two bills which by the rules gov¬ 
erning Congress are permitted to be acted upon, will not accomplish 
the result demanded. 

In the hopes that the people, as well as their representatives in 
Congress, may give this most serious matter attention early enough 
to change the course of things here to give them a better turn, I have 
labored to point out a few things that must be done if we would 
give the people any material relief. I am not given sufficient time 
to state all the facts that I wish to in this report. I have no greater 
capacity than other Members, but I have put in the time to investi¬ 
gate carefully the conditions. I have gone out among the people 
and seen the rich and poor in actual operation in business and work 
and have studied them there as well as in their homes. I have had 
enough experience in various ways to enable me to understand quite 
well why it is that a few people are now getting all the wealth that 
results from the labor of people generally, and what is more import¬ 
ant, I know that the power of the few to outrageously extort from 
the people generally can be prevented. For the information of any 
Member who has not had time to make the investigation for himself 
and who wishes to study the subject further from my viewpoint and 
so informs me, I will furnish a book which I have just published on 
Banking and Currency and the Money Trust, and also a speech which 
I delivered in the House August 2, i912. 

THE LOWER COST OF LIVING AND ITS RELATION TO MONEY AND CREDIT 
AND TO INTEREST, DIVIDENDS, RENTS, AND PROFITS. 

We must have food, clothes, and shelter, and require the instru¬ 
ments with which to ply our daily work. These are the prime 
necessities, and are made available only as the product of labor. 
They determine the initial cost in living. When the means of the 
individual units in our social order—that is, of the people—are safe¬ 
guarded and kept unencumbered while they provide their prime 
necessities, their securing benefits from the social order in excess 
of such prime requirements will be assured as a consequence. A 
few concrete illustrations will make that clear. 

It must be kept in mind that the Government of the United States 
and of the several States has established a policy supported by 
general practice, by statutes, and the decrees of courts, that the 
owners of property are legally entitled to a rate of interest or divi- 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 149 

dends or profit return, that in and of itself encumbers all people. 
The people must have the use of the property or the products from 
its use and therefore are compelled to pay the interest. The power 
of its enormous burden I show in the following interest table com¬ 
piled by a former Librarian of Congress. This table shows the 
growth of $1 by compounding interest in the manner of the banks. 
One dollar loaned for 100 years would grow as follows: 


Interest at— 

6 per cent per annum would amount to. $340 

8 per cent per annum would amount to. 2, 203 

10 per cent per annum would amount to. 13, 808 

12 per cent per annum would amount to. 84,075 

18 per cent per annum would amount to. 15,145, 007 

24 per cent per annum would amount to. 2, 551, 798, 404 


I shall cite a few individual cases from which Members of Congress 
can easily determine that not only on paper and in theory is the 
Government supporting a policy of pauperizing the people, but it is 
actually pauperizing them by its support of this practice. Use the 
table above, and from it the tremendous power of interest and divi¬ 
dends to oppress the plain producers may be seen. The individual 
fortunes are stacked up against the people’s daily energy, so that 
from the products of their toil the interest, dividends, and rents must 
be paid. It means that dead capital is stacked up ag*iinst human 
life so as to make humanity subservient to so-called “vested rights,” 
by law privileged to take an extortionate toll for the use of sub¬ 
stance which has been produced by the people’s own toil. That is the 
incumbrance to which I referred as being directly and indirectly 
responsible for the high cost of living. No bill that would properly 
deal with this problem has been permitted by the so-called “leaders” 
in this Congress to get a fair hearing. On the contrary the “leaders” 
have appropriated the public committee rooms and the Halls of 
Congress as well, corralled subservient Members, locked the doors to 
keep the other Members and the public out, and produced bills that 
Members have been coerced to support under the guise of harmony in 
a party. 

The following cases to which the table of interest may be applied 
is illuminating: 

From the testimony given by George F. Baker (president of the 
First National Bank of New York City) before the committee 
appointed to investigate the Money Trust we learn that the opera¬ 
tions of a single bank produced in 50 years profits equal to $86,000,000, 
or 172 times its original capital. If that bank continues to do busi¬ 
ness and is allowed to pile up profits in that geometrical progression 
it alone, on an original investment of $500,000, in less than 100 
years would have the power to extort from the people more than the 
equal value of all the existing property in the United States, and 
that bank is but one of the 30,000 banks operating on an uneco¬ 
nomic system. 

The capital stock of the national banks alone, in 1912, was 
$1,046,012,580. The dividends paid for the year ending June 30, 
1912, averaged 11.66 per cent, which was in addition to the accumu¬ 
lation of a large surplus. Going at that rate, compounded as the 
banks do, they would have the equal of the entire present valuation 
of the country absorbed in less than 50 years and would have the 








150 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

surplus from year to year to do anything they wish with. These 
dividends are over and above all the expenses which include pa} 7 
for the clerks and high salaries for the officers connected with the 
banks. That is not all; the bank officials have unusual opportu¬ 
nities, and most of them do speculate in various ways, and in the 
aggregate they get greater profits from deals that make no return 
to the banks than the actual dividends declared. What I have 
named includes the national banks alone. There are more than 
twice as many other banks, loan and trust companies of the different 
kinds. These do about twice as much business as the national 
banks. That is just one great interest, the banking and financial. 

There are the railways, the steel and iron companies, the oil com¬ 
panies, the coal companies, the telegraph and telephone and numer¬ 
ous other companies, besides a thousand or more great individual 
fortunes, that concentrate into very limited control the principal part 
of the active capital in the country. This is held on one side by the 
so-called capitalists, protected by the “vested rights doctrine,” 
which means law, that enables them to extort from the people in what 
are called dividends, interest, rents, and profits, an amount that, as 
shown by the interest table given before, is absolutely sure to keep 
the cost of living high and to keep the people working to support 
that system. By that system any person who can get a few thousand 
dollars can live in idleness or as a spendthrift on the interest that 
the working people of this country are forced to pay. 

Members of Congress are intelligent. What I have already stated 
is sufficient to show any intelligent person that our present system is a 
fraud on the people. No intelligent, self-respecting people can long 
tolerate a governmental system which by its established and ex¬ 
pressed policy places an unnecessary burden on the citizenship. I 
shall not multiply the examples showing the injustices created by the 
policy of Government. A word to the wise is sufficient. To others 
it would be hopeless to pile up examples. 

WE REQUIRE TO LIBERATE THE PEOPLE FROM EXCESSIVE INTEREST. 

Under the Glass bill the amount of money that would be exclus¬ 
ively within the control of the banks within a few months after its 
becoming a law would be increased. The bankers’ powers to collect 
interest would be considerably augmented. It is on that account 
that the Glass bill does not provide a remedy to meet the people’s 
greatest necessity. 

There is but one way to meet the financial necessities of the people, 
and that is to have the Government support all the people in what¬ 
ever useful industry they may be engaged. The Government must 
withdraw from the banks the exclusive monopoly control of financing 
the people and give to every legitimate and necessary enterprise 
impartial governmental support. It is absolutely necessary to an 
independent people that the Government should stand ready to do 
that. Then the bankers, seeing that they no longer have an ex¬ 
clusive monopoly, would exercise the office of an agency instead of 
holding the hand of mastery. With that purpose in view, and to 
pave the way for very early permanent relief to the people, I offer 
the following amendments to the Glass bill: 


Changes In The banking and currency system. 151 

Strike out the title of the Glass bill and substitute the following for 
its title: 

A BILL To amend the national banking laws, to provide a revenue system by which 
the Government taxing powers shall be represented by United States currency 
drawn on the people of the United States to be disbursed through the governmental 
agencies on appropriations by Congress for services rendered or to be rendered the 
Government, to inaugurate, develop, and maintain an American financial policy 
and currency system which will liquidate and eventually abolish debt, National, 
State, and municipal, and put the public and private enterprises, industries, and 
exchanges upon a sound economic basis, and remove the power of private interests 
to monopolize the mediums of exchange, and for other purposes. 

Also strike out all of the Glass bill following the enacting clause, 
except sections 26, 28, and 29, and renumber said sections so as to 
be numbered sections 18, 19, and 20, respectively, and in lieu of the 
part thus struck out insert after the enacting clause the following: 

FISCAL DEPARTMENT. 

Section 1 . That there is hereby established a new fiscal department of the United 
States as an adjunct to and within the jurisdiction of the Treasury Department of the 
United States. The board of said fiscal department shall consist of eight members. 
This number shall include the Secretary of the Treasury, who shall be member ex 
officio, but without voting power except as specifically in this act provided, and seven 
others, nonpartisan, to be selected by the President, by and with the advice and con¬ 
sent of the Senate, and whose term of office shall be for ten years: Provided, That in 
naming the first board one shall be named for two years, one for four years, one for 
six years, one for eight years, and three for ten years, and always subject to removal by 
and with the consent of the Senate. The salaries of the seven members thus appointed 
shall be fixed by Congress annually in the appropriation bills. The Secretary of 
the Treasury shall be the chairman of said board and shall select a first and second 
vice chairman, who shall, in the order named, preside at meetings in the absence of 
the Secretary of the Treasury. The Secretary of the Treasury shall have no vote 
except in case of a tie vote, when he may vote to break the tie. Five members shall 
constitute a quorum. The seven members on the board appointed by the President 
and confirmed by the Senate shall devote their entire time to the business of the fiscal 
department and do the principal part of the work in order to establish in practical 
working order a new fiscal department; that said board shall have authority to 
employ such assistance and incur such expenses as may be necessary in the perform¬ 
ance of their duties, and for such purpose there is hereby appropriated $100,000, or 
so much thereof as may be necessary, to be paid out of the moneys in the Treasury not 
otherwise appropriated upon vouchers approved by the Secretary of the Treasury. 

UNITED STATES CURRENCY. 

Sec. 2. That in aid of Congress in pursuance of the power conferred by the Constitu¬ 
tion upon Congress to coin money and regulate the value thereof the fiscal department 
is hereby authorized to issue a new United States currency, which shall be in the form 
of public-service certificates, and these shall state upon their face in substance that the 
bearer has performed a public service of the value stated in the certificate, that each 
separately is issued and circulated for value received under the provisions of this act, 
and the same shall be the lawful money of the United States and shall be receivable 
at par for all debts, dues, and demands, public and private, within the jurisdiction 
of the United States, created after the passage of this act; that the same shall be printed 
and engraved by the Bureau of Printing and Engraving from plates and dies devised 
by the fiscal department, and shall be issued from time to time in such quantities 
and in such denominations as the public interests require, and in all cases, except 
where otherwise provided in this act, shall first be placed in circulation by being 
earned in public service of the Government or in the supply of some material needed 
for Government use, and then for its full par value, and shall not after returning to the 
Government be again reissued or circulated except for a like purpose. 

DISTRIBUTION OF UNITED STATES CURRENCY. 

Sec. 3. That to carry out the-appropriations made by Congress, the fiscal department 
shall issue the United States currency authorized by this act to the various depart¬ 
ments of Government for all public purposes that require or may require the expendi- 


152 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


ture of public funds. That when funds have been appropriated by Congress and the 
United States currency is issued to cover such appropriations, the fiscal department, 
for the convenience in the transaction of business through the Government disbursing 
agencies, may deposit such currency, as well as checks, drafts, and other receipts of the 
Government, in national and other banks, or in postal savings banks, for checking 
accounts, but banks shall not be required to pay interest on such accounts. Deposits 
of checks, drafts, and other evidences of dues to the Government may be made in the 
banks, but otherwise the United States currency only shall be deposited in the banks 
by the Government, which currency when so deposited shall be held as a specific 
fund to special deposit, but checks and drafts and other evidences of dues to the Gov¬ 
ernment deposited by the Government shall not be distinguished from or have any 
privileges or preference over other deposits of individuals, whether private or otherwise, 
in the same banks. No deposits shall be made in banks for the purpose of creating 
surplus therein but merely to facilitate the transaction of public business. The 
banks shall, so long as there remains a credit to the Government’s general account, pay 
checks drawn by the Government agencies out of the general account, and the use of 
the special deposits of United States currency in payment of such checks is hereby pro¬ 
hibited until the general account shall have been exhausted, in which case payment 
may be made out of the special deposit. 

CANCELLATION OF EXISTING CURRENCY. 

Sec. 4. That from and after the passage of this act all United States notes, currency, 
gold and silver certificates, and national-bank notes shall be full legal tender for all 
debts and dues, public and private, in the United States, its Territories, and posses¬ 
sions, except debts or contracts existing at the time of the passage of this act, which 
by their terms are payable in some other forih of money or material, but while in 
circulation the present money and currency aforesaid, as well as all existing coins, 
shall not be deprived of its present qualifications, and the outstanding United States 
notes, currency, gold and silver certificates, and bank notes shall be redeemed on 
demand in such other form of money as now provided by law; and as soon as practi¬ 
cable after any United States notes, currency, gold and silver certificates, and bank 
notes come into the possession of the Secretary of the Treasury for redemption the 
same shall be canceled and destroyed: Provided, That when such redemption is of 
national-bank notes the amount canceled shall operate in liquidation of an equal 
amount of United States bonds securing the same, except that any national bank 
may, by giving the fiscal department such notice as the said department may require, 
have the national-bank notes redeemed, reissued by complying with the laws as to 
the maintenance of security, and no such notes, currency, or other certificates shall 
be reissued except as in this act provided. All existing laws for reissuing or recir¬ 
culating any such notes, currency, or certificates are hereby repealed. That when 
gold or silver becomes the property of the United States .their legal-tender quality, 
except as to subsidiary coin required for circulatory purposes for small change, shall 
cease and the gold be reserved for use in the redemption of outstanding obligations 
and for use and in aid of interstate exchanges when the Government shall in any 
way be interested. That the fiscal department may purchase gold from time to 
time at the marketable value, if necessary, for either of said purposes, and also when, 
in its judgment, the national debt can thereby the better and the sooner be extin¬ 
guished, and except as authorized by this act, the United States shall receive gold 
for coinage only, the purpose being solely to affix the governmental stamp of weight 
and fineness to such coins, but all coins so made after the passage of this act shall 
have no legal-tender quality. A charge equal to the cost of coining the same shall 
be made, which coin shall forthwith be removed by whoever it may have been 
coined for, and no department of Government shall hereafter give storage facilities 
to any gold bullion or coins not belonging to the United States and shall issue no 
more gold or silver certificates. 

Sec. 5. That on and after three years from the passage of this act a storage charge 
equal to the cost of maintaining the same shall be charged and collected on all gold 
and silver held against outstanding certificates, it being the ultimate purpose and 
policy of this act to remove the Government fiat from all metals and reduce metals 
to their commercial commodity value. 

AID TO THE STATES. 

Sec. 6. That all States of the Union whose laws now or hereafter confer upon them, 
or their executive or other State functionary, the power to borrow money on the credit 
of the State or to guarantee the obligations and debts of their counties, towns, boroughs, 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 153 


villages, cities, municipalities, school districts, or political divisions for any just and 
recognized public use, may apply to the Secretary of the Treasury to secure loans of 
United States currency for the purpose of defraying the current expenses of the State 
or any of its political subdivisions aforesaid for which the people of the State or po¬ 
litical division aforesaid are taxed. The Secretary of the Treasury shall certify to 
Congress as often as practical, not less than once annually at the beginning of each ses¬ 
sion and oftener when practical, an abstract of such applications and the details so 
far as practicable in regard thereto, to the end that Congress may in its discretion 
appropriate United States currency in such sums as it deems best for the use of such 
State or States applying therefor, and to be loaned by the Federal Government to the 
States only. Before any such loans shall be made the fiscal department shall recom¬ 
mend uniform rules and regulations, so that Congress may not discriminate or allow 
discriminations by the fiscal department in making such loans, and shall prevent 
the States, in the use of the funds secured, from allowing any discrimination in the 
administration of the system. Such proposed rules and regulations shall provide for 
a uniform expenditure by the States, so that the issue of United States currency and 
the volume shall conform to the demands of business, public and private, avoiding 
alike redundancy and insufficiency, and shall provide that no State shall pay out 
said currency secured from the Federal Government except for the full face value of 
the same in service to the public for public purposes for which the people are annually 
taxed, so that the currency may be returned in the payment of such taxes through the 
usual methods; and before any State shall be extended a loan it shall establish and 
submit to the fiscal department the rules by which it would be governed in the ex¬ 
penditure, which rules must be satisfactory to the fiscal department. All rules and 
regulations thus proposed shall be referred to Congress for such action as Congress may 
adopt. 

Sec. 7. That the charge for loans to the States and the manner of guaranty by the 
States and the form of guaranty to insure the proper expenditure of the same shall be 
adopted by the fiscal department and shall in every respect be uniform to the States 
and subject to review and confirmation by the Senate. 

NATIONAL PUBLIC WORKS AND IMPROVEMENTS. 

Sec. 8. That the fiscal department shall devise a plan whereby Congress may be 
guided in the enacting of legislation to authorize the fiscal department to establish a 
system of national public works and improvements adapted at all times to give imme¬ 
diate relief to all congested labor conditions within the territorial jurisdiction of the 
United States and render available all surplus labor and insure against enforced idle¬ 
ness and the ills incident thereto by means of the inherent powers of the Government 
to establish justice and promote the general welfare, and shall report such plans and 
the outlines of a policy to Congress with recommendations. 

AID TO THE AGRICULTURAL AND HORTICULTURAL INTERESTS. 

Sec. 9. That the fiscal department shall proceed with all reasonable expedition to 
communicate and cooperate with the authorized representatives, organized and 
unorganized, of the agricultural and horticultural interests of the Nation, with a view 
to the adoption of a plan and policy of systematizing the production, storage, transpor¬ 
tation, and distribution of agricultural and horticultural products, to the end that 
both the producers and consumers of such products may have complete emancipation 
from the present extortions of speculators and manipulators in these products and of 
organized and trustified storage, elevator, and transportation combinations now monop¬ 
olizing the same and controlling and manipulating the prices of such products both to 
the producers and consumers, and shall, if practical, propose such an extension and 
enlargement of the postal savings system, and if need be, increased issue of United 
States currency in aid thereof as will provide for a system of Government loans to 
owners and operators of improved agricultural and horticultural lands, upon such 
terms as will amply insure the repayment of such loans, at a rate of interest not to 
exceed four per centum, payable semiannually. Such interest shall be reduced to a 
nominal interest barely sufficient to reimburse the Treasury as soon as the national 
debt can be extinguished, and such plan shall be reported to Congress with recom¬ 
mendations. 

GOVERNMENT LOANS TO WAGE EARNERS. 

Sec 10. That the fiscal department shall proceed with all reasonable expedition to 
communicate and cooperate with the organized and unorganized wage earners to 
consider and devise a plan and policy for a system of Government loans to wage 


154 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


earners at the lowest rate of interest consistent with the cost and integrity of the 
service, which loans will enable them to provide homes independent of real-estate 
speculators with an adjunct and department of wage and salary advances to further 
protect wage and salary workers from the overcharge made by loan agencies. These 
plans shall be submitted to Congress with recommendations. 

AID TO MANUFACTURING INDUSTRIES. 

Sec. 11. That the fiscal department shall proceed with all reasonable expedition to 
an inquiry into the conditions of the manufacturing industries of staple products in 
the United States and Territories with a view to ascertain the state of such industries 
and devise plans for the inauguration of a policy to aid and assist such of those man¬ 
ufacturing interests as are not involved in monopolistic combinations, or are able 
and disposed to extricate themselves from existing monopolies, which plans shall 
involve a system of Government loans and advances to such manufacturing interests 
as are able to insure the repayment with the lowest rate of interest consistent with 
the cost and the integrity of the service, which plans shall also be reported to Con¬ 
gress with recommendations. 

IN GENERAL. 

Sec. 12. That it shall be the duty of the fiscal department to investigate into the 
financial conditions of all legitimate industry, work, and enterprise of whatsoever 
character, the pursuits and results of which, under proper conditions, promote the 
general welfare, and ascertain what plan or plans, if any, can be contrived for their 
aid by extending Government loans to them or such of them as require aid. The 
fiscal department shall report to Congress from time to time thereon with recom¬ 
mendations. 

Sec. 13. That the fiscal department in its administration shall take notice of the 
economic fact that payment by the Government for a service to the Government 
involves a collection from the people of an equal amount plus the expense of collec¬ 
tion, and that the issue of United States currency in payment of Government expenses 
creates a demand on the part of the people equal to the currency required to be re¬ 
turned to the Government in cancellation of taxes or dues; and further, that economic 
private enterprise (eliminating speculation) for the production of commodities or the 
rendering of services for the use of others legitimately involves the return of commodi¬ 
ties or services of equal value, whether the same is accomplished by direction or indi¬ 
rection, and that whenever actual commodities or services are not immediately or 
directly exchanged in a cancellation of the respective obligations, then a credit repre¬ 
sentative is necessary, and so far as possible, in a practical sense, when applied to the 
affairs of the people as they exist, the obligations of credit should be liquidated without 
the burden of a greater charge than is consistent with the cost and integrity of an honest 
and just system. Therefore in the supply of United States currency guaranteed by 
the credit of the people as a medium of exchange, the volume to be placed in circula¬ 
tion should conform to the needs of commerce, avoiding alike both redundancy and 
insufficiency, and with that as the purpose the fiscal department shall make estimates 
and report to Congress, for under the Constitution no money shall be drawn from the 
Treasury but in consequence of appropriations made by law. 

AUTHORIZING NATIONAL BANKS TO BORROW RESERVES. 

Sec. 14. That the national-bank act is hereby amended so as to permit national banks 
to borrow from their own reserves by complying with the provisions of this section. 
That any national bank having its capital and surplus unimpaired may apply to the 
fiscal department to borrow from its cash reserves maintained in its own vaults. The 
bank so applying shall set forth in detailed description the securities it proposes to 
deposit with the fiscal department for the loan, which securities shall be of the same 
character as is by law and practice now required or as may be hereafter required for 
the deposit of Government funds in banks. If in the opinion of the fiscal department 
the public interests require the extension of any such loan or loans, the same shall 
be authorized by said department to the extent it deems wise; but before a bank 
authorized to borrow from its reserves shall be allowed to do so its securities shall be 
approved and deposited with the fiscal department in such amounts as the fiscal 
department shall demand, and the bank or banks having complied with all the rules 
and regulations of the fiscal department, on order from said department, there shall be 
transmitted from the nearest subtreasury to the bank or banks to which such authority 
is extended United States currency to the extent of the amount authorized to be 
borrowed from the reserves, and the bank shall specifically retain the United States 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 155 


currency thus received in its vaults, and then may loan or pay to its depositors or 
pay its other obligations from its other cash reserves held in its vaults to the extent 
authorized, and shall substitute the United States currency thus paid out to be kept 
as reserves and for the benefit of the bank’s creditors to the extent of the actual amount 
of the reserves that have been borrowed and paid out by the bank, as herein author¬ 
ized. Any bank thus borrowing shall pay interest to the fiscal department on the 
amount of United States currency loaned to it under the provisions of this section 
at a rate which shall not be in excess of four per centum per annum for the first three 
months, which rate shall be increased thereafter monthly at the rate of one per centum 
per annum for each additional month until paid, but subject to the fiscal department 
requiring the payment when in its opinion the public interests require it. For the 
special purpose of carrying out the provisions of this section and the following sec¬ 
tion there is hereby appropriated, in addition to all other sums appropriated by this 
act, the sum of $1,500,000,000 of United States currency, authorized by this act to 
be specifically retained by the fiscal department for said purpose, and to be specifi¬ 
cally retained by the fiscal department for said purpose, and to be printed and engraved 
in advance in such amounts only as are necessary to insure a sufficiency immediately 
when required. 

STATE BANKS. 

Sec. 15. That from and after the passage of this act any bank or banking association 
or trust company organized or incorporated by special law of any State, or organized 
under the general laws of any State, or of the United States, and whose capital and 
surplus is unimpaired, may make application to the fiscal department for the right 
to borrow from its cash reserves maintained in its own vaults on complying with this 
act and the rules and regulations of the fiscal department: Provided , That the same 
shall be consistent with the laws of the State under which such bank or trust com¬ 
pany is organized: And 'provided further , That a majority of the stockholders in the 
bank or trust company of such applicants shall sign iu writing their consent with 
the fiscal department to bring the banks so applying within the laws, rules, and 
regulations that govern national banks in securing such loans, except that no bank 
shall be refused the privileges and advantages in regard to such loans on account of 
the amount of its capital and surplus so long as the same remains unimpaired. All 
such banks having complied with the provisions named shall be entitled to like 
privileges accorded to national banks. 

The substance of what I offer in amendment above is embodied in 
a bill that I introduced August 8, 1913. Sections 14 and 15 provide 
for an emergency currency that would absolutely relieve the banks 
of difficulty to furnish funds to move the crops, and would save the 
Nation from the burden of establishing another retinue of officials 
for 12 or more central banks, such as the Glass bill provides. With 
these amendments that I offer enacted into law, the many economic 
evils now existing in our social conditions would directly cease. 
Furthermore, the bankers would then be instrumental in carrying 
out the great reform. Once their exclusive privilege and monopoly 
is taken from them, we shall have the benefit without the burden of 
their practical dealings. 

The bill that I have offered as a substitute for the Glass bill has all 
the elements of a complete system, and would reach its perfection 
through the work of the board of the fiscal department, which board 
would give all its time to that purpose. It would not discard the 
present system, but would require it to stand on its own merits. If 
the old system would respond to the demands of freedom in trade, 
that system would continue in use, but if it failed, the new system 
would respond. The issue of currency would be scientifically regu¬ 
lated to meet the demands of trade. It would be controlled by the 
Government instead of by the banks. While this is not a party 
question the following plank in the Progressive Party platform states 
the correct principle: 

The issue of currency is fundamentally a Government function and the system 
should have as basic principles soundness and elasticity. The control should be 


156 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


lodged with the Government and should be protected from the domination of manipu¬ 
lation by Wall Street or any special interest. 

GOLD STANDARD RESPONSIBLE FOR MANY OF THE SOCIAL EVILS. 

It will be objected to my bill that it discredits the gold standard. 
It is difficult to remove a prejudice such as that existing in tavor of 
the gold standard. 

On March 14, 1910, after an adroit campaign carried on by the 
special interests covering a considerable period, Congress passed an 
act which called for the permanent establishment of the so-called 
“gold basis” for all of our money. Since then there have been new 
inventions made for mining gold which make the available amount 
more plentiful, with the result that the “gold basis” is puzzling the 
Money Trust. But there is a still further complication and that is 
that the people are becoming familiar with the fallacy of the “gold 
standard” and they are becoming dissatisfied in proportion to their 
understanding of its bad effects. 

The dollar is worth less now than it was in 1900; that is, it will buy 
less. That fact, particularly, does not satisfy the creditor class. They 
have had enormous interest returns, but they have lost a part of that 
advantage because of the depreciation of the purchasing power of the 
dollar. To a greater or less extent all of the people are dissatisfied 
with it; many for selfish reasons; and they only desire a remedy to 
be adopted which will help them alone, but there are fewer of these 
than there are of those who seek a reform which will better the con¬ 
ditions of all. 

We have seen many comments in the press lately in regard to a 
plan devised by Prof. Irving Fisher, of Yale University. Mi. Fisher 
is no doubt an honest and earnest worker who is trying to reform the 
gold standard. He has arrived at the inevitable conclusion that every 
capable student must finally adopt, and that is that the present gold 
standard is not the standard by which we can secure honest money. 

Prof. Fisher has given a most thorough analysis of the production 
and supply of gold and shown quite extensively the effect of its present 
use as a money standard upon the prices of commodities. I have 
given below a synopsis of his plan as stated in the Boston News Bureau 
of December 28, 1912. It is as follows: 

Prof. Fisher is one of the most distinguished economists in this country, if not in 
the world. He is eminently practical and not merely theoretical in all his work and 
writing. 

All who have to do with long-time contracts recognize the desirability of a monetary 
unit of fixed purchasing power. 

The following is Prof. Fisher’s plan for converting the gold dollar into such a com¬ 
posite unit, thus standardizing the dollar. Such standardization would be effected 
by increasing or decreasing the weight of gold bullion constituting the ultimate dollar 
in such a way that the dollar shall always buy the same average composite of other 
things. 

Every dollar in circulation derives practically its value or purchasing power from 
the gold bullion with which it is intercontrovertible. Every dollar is now intercon- 
trovertible with 25.8 grains of gold bullion (nine-tenths fine), and is therefore worth 
whatever this amount of bullion is worth. 

The very principle of intercontrovertibility with gold bullion which we now em¬ 
ploy could be used to maintain the proposed standardized dollar. The Government 
would buy and sell gold bullion just as it does at present, but not at an artificially 
and immu/tably fixed price. 

At present the gold miner sells his gold to the mint, receiving $1 in (say) gold cer¬ 
tificates for each 25.8 grains of gold, while on the other hand the jeweler or exporter 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 157 


buys gold of the Government, paying $1 of certificates for every 25.8 grains of gold. 
By thus standing ready to either buy or sell gold on these terms ($1 for 25.8 grains), 
the Government maintains exact parity of value between the dollar and the 25.8 
grains of gold. Thus the 25.8 grains of gold bullion is the virtual dollar. 

The same mechanism could evidently be employed to keep the dollar equivalent 
to more or less than 25.8 grains of gold, as decided upon from time to time. 

The change in the virtual dollar (bullion weight of gold intercontrovertible with 
the dollar) would be made periodically, or once a month, not by guesswork or at any¬ 
body’s discretion, but according to an exact criterion. This exact criterion is found 
in the now familiar “index number,” which tells us whether the general level of 
price is, at any time, higher or lower than it was. Thus, if in any month the index 
number was 1 per cent above par, the virtual dollar would be increased 1 per cent. 
Thus the dollar would be “compensated ” for the loss in the purchasing power of each 
grain of gold by increasing the number of grains which virtually make the dollar. 

Prof. Fisher has performed a great service to his country and to the 
world by discrediting the gold standard so convincingly. When a man 
of his prominence and ability has the courage to state his beliefs, the 
more timid of those holding like views, of which there are many, ought 
to take an active part in supporting the indictment of the gold 
standard. 

While the professor has clearly indicted the gold standard and con¬ 
clusively shown that it is a false one, I do not agree with the remedy 
that he proposes. Instead of proposing to abandon gold as a standard 
and relegating it to its natural place among the articles of commerce, 
he advocates its reform and would still retain is as a standard by 
making the weight of the dollar variable and determining its value 
from time to time according to a commodities index. The professor 
is surely correct in his assumption that commodities have actual value 
worth considering in connection with the establishment of a true 
exchange system based upon the actual value of services and com¬ 
modities. It is to be regretted that Prof. Fisher has complicated the 
conclusions he arrives at by continuing to consider the gold standard 
entitled to any greater recognition than is accredited to commodities 
in general. After proving its falsity he should have suggested the 
abandonment of the gold standard. 

If we were compelled to change the weight of the dollar monthly, 
quarterly, or even annually, as we would have to do with a commodity 
dollar; if we tried to keep it of the same purchasing power all of the 
time, it would give us more trouble than we now have in changing the 
tariff schedules; but while Prof. Fisher has performed a world service 
in being instrumental in giving general publicity to the falsity of the 
gold standard, that publicity is pushed by the influence of selfish 
interests, because they are pleased with the remedy, lie proposes. If 
he had not proposed to standardize the gold dollar, his proof that it 
is not an honest measure of value would have received no publicity 
greater than he himself and his friends and a few others could give to 
it. It would have been ridiculed if he had not proposed a remedy 
that suited the interests, for the money sharks demand some measure 
that is favorable to them and not fair to the people. They have 
always sought to make the world believe the gold standard to be 
sacred and, therefore, that the people were bound to support it, no 
matter how much it wronged them. These selfish interests have sim¬ 
ply seized on this proposed remedy, which I believe Prof. Fisher to 
have erroneously suggested without his having given as much thought 
to the remedy as he had to the facts which conclusively prove gold to 
be a false money standard. 


158 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


It may seem strange to some people that this remedy suggested by 
Prof. Fisher should be advertised all over the world now, but there is 
nothing strange about it, for the all-powerful Money Trust interests 
are quick to observe anything that might be made use of by them, and 
immediately upon its appearance they seized upon the idea of stand¬ 
ardizing the gold dollar and were instrumental in having the plan 
advertised in order, if possible, to induce the people to accept it as a 
remedy. 

It may not be generally realized by the people that this is a critical 
period in the establishment of governmental policies, but the interests 
are especially alert to that fact. Everything is being done to make 
the people accept some worthless makeshift, and in some cases 
actually harmful, so-called “remedies/ 7 which, if accepted, will 
delay the adoption of real substantial remedies until another genera¬ 
tion shall enter public life. It is because of that fact that I fear the 
Glass bill may delay a true remedy. Simultaneously, in all countries 
where they have the gold standard—and that is in most countries, and 
in the others equally unjust standards are used—articles were pub¬ 
lished which were substantially the same in substance as the following 
which was published in a Washington paper on April 12, 1913: 

TO ASK INTERNATIONAL GOLD-DOLLAR AGREEMENT. 

One of the features of the proposed currency legislation which will be considered 
by Congress is the initiation of a movement for an international agreement for the 
purpose of preventing the depreciation of the gold dollar. 

Such action has been suggested by eminent economists. It is widely held that 
the enormous increase in gold supply and the consequent depreciation of the gold 
dollar is the real cause of the high cost of living and high prices. 

Democratic leaders, especially Senator Owen, chairman of Banking and Currency, 
feel that if the cost of living is to be reduced the gold situation must be taken into 
account. 

Not all of the articles appearing in the press directly discuss the 
gold standard, but many of them are adroitly written in order to 
impress the reader and prepare him to receive the information that 
the gold dollar is not now a good standard, but further designed to 
make the reader come to a wrong conclusion on the question of a 
remedy. When the first half of an argument is true, unless the reader 
is very careful it goes far toward making him believe that the second 
half is also true, and that is frequently the case even when the con¬ 
clusions are wholly erroneous, as long as the material is adroitly 
handled. That is where the danger comes in the discussion of the 
gold standard from the side of the special interests alone. Innu¬ 
merable articles are now published, in fact the plan is system¬ 
atically advertised for that very purpose. But there are other 
articles which are written and published in good faith, and in these 
there is no intention to deceive. An article was published in Col¬ 
lier's Weekly, also on the date of April 12, 1913, which I quote: 

THE DISCOURAGEMENT OF THRIFT. 

The people of the United States have now saved up well over a hundred billions 
as measured by current money standards. The aggregate is amazing, and, while the 
amount per capita is not large, nothing like it was ever known before in any country. 
This saving takes on many forms—the largest, of course, being in the rearing of 
children, which shows itself in the steady increase in the value of land. The next 
is ownership of enormous amounts of securities of railway and industrial companies 


CHANGES IN THE BANKING AND CURRENCY SYSTEM 159 


and the like. Then probably comes life insurance. The savings in banks are relatively 
small. The increment in land values goes to much less than one-half of the population, 
even in theory, and a comparatively small number of people get the benefit which is 
made up of the efforts of all. The larger amount of the securities outstanding repre¬ 
sents a more or less fixed value. The eighteen billions of insurance in force is of ab¬ 
solutely fixed value. While these securities and insurance obligations were being 
created, the relative worth of the dollar has been rapidly declining. The forehanded 
folk who saved and loaned this money get for it an average return of less than 5 per 
cent, and if they received back the principal now it would buy of land or food 
one-third less than 12 or 15 years ago. This is a savage penalizing of thrift. We 
believe that events will soon focus public attention upon this serious problem. The 
procedure of the insurance companies, which in part is enforced by law, is of special 
interest. The companies collect above $600,000,000 annually from policyholders, 
and from this loan largely on long-time notes. They act simply as money brokers, 
but with this effect, that with the rapid depreciation of the currency in the last 15 
years, they are now returning to their policyholders, on death claims or matured 
policies, relatively far less than the average amount of money which the policy¬ 
holders have paid in. Roughly speaking, the policyholder has been paying in 
$1 bills; he will get back 66-cent pieces. Theoretically, the compounding of the 
interest on premiums ought to pay the companies’ expenses and yield the policy¬ 
holders a profit on the average payment. In point of fact, with the extravagance 
of the companies and the decline in the purchasing power of the dollar, there is a 
serious loss. This is not as it should be. A remedy might lie in a radical change of 
investment. A larger part of the insurance money is loaned directly or indirectly on 
land. Actual ownership of tho land ought to be as safe as loans, and, if gold inflation 
is to continue, more profitable. It is something to think about. 

Surely Colliers states the truth when it says that it is something 
to think about. We have indeed been buncoed long enough—so long 
that we ought to think about it seriously. It is up to Congress right 
now. 

I believe that the remedy is necessarily twofold: First, and con¬ 
current with the establishment of a new system, the old system should 
be so amended that some of its most serious administrative defects 
will be diminished. It should then serve as a vehicle for carrying out 
the equitable relations and obligations already existing as a result 
of the legitimate business based upon it. 

Second, an entirely new system should be instituted, which shall 
be founded upon the natural demands of commerce and trade and 
divorced from personal favor or property preference. This new 
system should be the basis for the establishment of a permanently 
solid and equitable means of exchange. 

In order to completely accomplish the latter, we will have to cease 
monetizing gold. But that prohibition would not prevent, nor should 
we desire to prevent, the use of gold as a means of exchange. The 
Government, on being paid the cost of stamping, may properly stamp 
the weight and quality on any commodity of commerce and let it 
pass in exchange on a basis of its own intrinsic value. Anyone who 
demands more than that privilege for the use of a metal or other 
commodity is intentionally unfair to the rest of us, or ignorant. In 
most cases it is because the persons accept seeming facts without 
actually understanding the conditions which surround them. If the 
owner of gold, silver, or other commodity desires to pay the Govern¬ 
ment the expense of the operation, there need be no objection. To 
so stamp gold and make it legal tender is simply to decrease the 
value of our labor, and of our property—if we have any, unless we 
also possess gold enough to offset, which most of us do not. 

The owners of gold claim that it has an intrinsic value which 
makes it the most practicable commodity to use as money. Because* 


160 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

of its small bulk it is a convenient commodity to ship and store. 
But it can be used as a means of exchange without making it legal 
tender. The Government could still stamp its weight and fineness, 
and then it could be exchanged in the same way that it now is if it 
really is intrinsically worth what they say. If it is not, then it should 
be exchanged for only what it is worth. When the owners of gold ask 
anything more, they, in effect, admit that it becomes more valuable 
with the legal-tender privilege than without. They would not demand 
it if that were not true. It can not be made legal tender except by 
governmental act. A governmental act is the act of the people, and 
there is no reason why the people should stamp gold or any other 
commodity that belongs to individuals with a special privilege. 
This results in a tax against themselves. Let gold be weighed and 
tested and given credit only for what it is. Existing coins will retain 
their legal tender while in circulation, but when the Government 
acquires any such, their legal-tender character should be removed, and 
after that bullion should be stamped with its weight and quality and 
should become an article of commerce standing on its own merits. 

If the owners of gold are correct in their statement that gold cir¬ 
culates on its intrinsic value, instead of partly on that and partly on 
the additional value it acquires by reason of the demand created by the 
legal-tender stamp, it is useless for them to ask that it be made legal 
tender, and if gold is not commercially worth what it circulates for as 
legal tender, then the owners are unjust in asking the public to sup¬ 
port the value added to gold by the Government stamp. Let them 
take whichever side of the proposition they wish. In the one case 
the legal-tender quality would be useless. In the other it would be a 
burden placed upon the public and supported for the benefit of the 
owners of gold. 

To cease monetizing gold or metal is to drop a practice long in¬ 
dulged in for the benefit of the money loaners. The people have 
become accustomed to paying them for the credit supported by 
themselves. I can not say that it can be entirely stopped. There 
are many practices that injure the people generally, but are never¬ 
theless followed. I simply call attention to certain facts that can not 
be successfully disputed. I know, and so does any careful student 
know, whether he admits it or not, that the fact that the Government 
stamps legal-tender privileges on gold creates an increased and arti¬ 
ficial demand for it, and consequently a merchantable value that is 
very much in excess of what it would be if the gold did ot have 
impressed upon it this legal-tender privilege. It now partakes of the 
character of monopoly. Every additional cent of credit given to it 
above intrinsic worth as an article of commerce, by reason of the 
Government’s stamping it legal tender, is first extorted from the 
people’s own credit, next accumulated in the form of so-called 
“capital,” and after that becomes the basis for charging them com¬ 
pound interest for generations—perpetually—if they shall not 
emancipate themselves by an abandonment of this false practice. As 
far as the principle is concerned, there is no difference between the 
Government stamping gold as legal tender and giving the owner the 
advantage of its increased value, and the same stamping process 
being applied to plain paper. 

Under the present practice all value in excess of what gold is 
actually worth as an ordinary article of commerce is fiat credit added 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 161 

to it by the people. If the same stamp were affixed to paper, it 
would all be fiat. It is simply a question of degree, and neither can 
be extended to the individual as a free privilege without robbing the 
people of all that is added by their credit. 

The whole problem simply reduces itself to a question of how long 
will the people submit to remaining industrial slaves to the system. 
The gold owners ridicule fiat greenbackers, yet they themselves are 
fiatists. If they are not, why do they object to gold circulating on 
its own commercial merits ? Why do they wish to coin it with any 
other designation than its weight and fineness and why force the 
people to take it as legal tender ? They are inconsistent in claiming 
a special privilege for gold. If gold is worth all they claim for it, it 
needs no extra function. If, on the other hand, it is not able to 
retain its present relative value without being legal tender, then that 
is positive proof that it should not be made legal tender. In the one 
case it is unnecessary; in the other case it is unjust. The Govern¬ 
ment will have to cease monetizing gold or any other metal as soon 
as the people generally realize its present imposition on them. 

You may say that some losses would be suffered in a readjustment. 
That will of course be admitted, but the losses would not begin to 
equal those that are continually taking place now. The excessive 
interest and expense of maintenance resulting from the use of the 
false system under which we operate is so great that, notwithstanding 
all of the modern inventions that have immensely increased the 
people’s productive energy, most of us fail to secure the ordinary ad¬ 
vantages that are due from this civilization to every honest, in¬ 
dustrious person. The interest, dividend, and rent charges alone, 
compounded as they are now, are absolutely sure to keep the greatest 
number of people in want and many in misery. 

I do not say demonetize gold. I simply say cease to monetize it. 
Coin no more metal with the legal-tender character attached except 
that required for small change. Our gold will circulate in foreign 
markets on its weight and quality equally well without the legal- 
tender privilege as long as foreigners will use it for their legal tender. 
Gold will do that as an article of commerce, and foreign nations may 
convert it into their own legal tender if they like, but any nation that 
uses gold as legal tender after a great nation like our own ceases to do 
so will be adding additional burdens to the present burdens of its 
people. 'Whatever gold we have in excess of what we need for the 
sciences and arts we can dispose of for such articles of commerce as 
we actually require, and it will be that much to our advantage as 
against the present practice of hoarding it. We have more gold than 
any other nation, and if we cease to monetize it the other nations will 
soon do the same. The common intelligence of the people generally 
has reached a point where they ought to take the lead in forwarding 
a plan which will prove the use of any commodity as legal tender to be 
a fallacy and result in the eventual discontinuance of such a practice. 
America should lead in doing this. 

Let us consider in concrete form the effect that the money loaners’ 
dollars (which, by the way, are the dollars that we use) have on the 
cost of things—and when I say cost I mean the expenditure in human 
toil necessary to acquire the necessaries, conveniences, advantages, 
and luxuries appropriate to human life. I shall not burden anyone 

8829°—H. Rept. 69, 63-1-11 


162 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 


with detailed figures, because a mere statement will satisfy those who 
are sufficiently interested to study the present practices in the light of 
their own observation and experience. I have examined the table of 
prices of various staple articles for a period covering 45 years and have 
come to the conclusion that the money loaners’ dollar is not a meas¬ 
ure fitted to the requirements of a people desiring equitable relations 
with each other. It is simply a gambling dollar, and prices are regu¬ 
lated by a manipulation of it instead of by the intrinsic value the com¬ 
modities possess as articles of necessity. The people who are engaged 
in useful occupations producing commodities or serving other demands 
of society are prevented from making the natural interchange of their 
products and services, because of the injection into their commerce of 
a fake currency and banking system, by the use of which specula¬ 
tors and financiers, so called, are able to pillage on all the exchanges. 
The system built up by these pillagers is an unnatural and unjust one. 

It often happens that the aggregate value in money of a large 
quantity of a useful commodity will command less in one year than 
that of a smaller quantity brought in another year. Who, for 
instance, will claim that 3,000,000,000 bushels of wheat (supposing 
that to be the world’s crop) is worth less in the aggregate for food 
and seed than 2,700,000,000 bushels, other things being equal, 
except money, which seldom is ? No one claims that 3,000,000,000 
bushels of whoat is actually worth less than 2,700,000,000. It is 
a fact, however, that the lesser quantity will often sell for as much, 
and sometimes more, than the larger quantity. A difference of 
10 cents a bushel will accomplish that result, if the 3,000,000,000 
sold for 90 cents and the 2,700,000,000 sold for $1. Illustrative 
of that fact, let me quote the following from the Saturday Evening 
Post of March 15, 1913: 


THE VICIOUS CIRCLE. 

We harvested bumper crops last year, you remember, May wheat at Chicago is 
worth 10 cents a bushel less than a year ago; corn and oats about 15 cents less. Yet 
commodity prices, as a whole, have declined scarcely at all. The index number, 
which compounds the price of many leading articles, is almost as high as ever, which 
means the cost of living is still about at the top notch. 

The bumper crops stimulated trade in many lines, and that usually brings higher 
prices; while wheat went down, iron and steel products went up. What you saved 
on flour you lost on the pan to bake it in. And Wall Street echoes with complaints 
that investors, spurred on by higher cost of living, are demanding more interest, 
thereby raising the cost of manufacturing and transportation. This higher cost must 
be offset by higher prices, to overcome which investors must demand still more interest . 

Meanwhile labor, so to speak, chases its own tail, demanding higher wages, which 
result in higher prices that consume the increased wages—which naturally induces a 
demand for still higher wages that result in still higher prices. 

Every farmer knows that a difference of 10 cents a bushel between 
the price a commodity brings in one year and the price it brings a 
different year is not uncommon, but the railways charge full price for 
shipping every bushel, and the larger the crop the more they get, 
while the farmer must handle the additional wheat and get less for it. 
A farmer having the equivalent of 300 bushels of wheat to sell in a 
year when crops are generally abundant expects to receive a little less 
per bushel than he would receive per bushel for 270 bushels in a year 
when crops were not abundant, but he does not expect to give away 
the 30 bushels difference because he has more wheat than the year 
before. If that were to be the result, it would pay him, from his own 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 163 

individual financial standpoint, to burn up a part of his crop when it 
was abundant. In fact, the cotton farmers 01 the South started to do 
that a few years ago when there was a large crop, and the price was 
very low. If the credit of the people had been coined into their own 
money instead of into the money-loaner’s money, no thought of so 
destructive a nature would ever have occurred to the cotton growers 
or to any other producer of commodities. 

"1 here should be no legal tender other than that issued by the Gov¬ 
ernment, and no individual ought to be able to obtain it without 
giving its equivalent in return. If such were the case the problem of 
interest (as a disturbing factor) would cease, and a new era would 
dawn upon the world. The present difficult problems created by our 
arbitrary and ridiculous banking and currency system would then 
give place to natural selection. I use the term “natural selection” 
in its scientific sense, because we can not run the Government in the 
interest of the people unless we follow the supreme laws that will 
unquestionably govern in the end. When we do there will be no 
choking up of the system by the arbitrary acts of the financial kings, 
for they are but a product of the arbitrary and unnatural practices 
that the people have fallen into the habit of using as a means of con¬ 
ducting their business, nor will the majority of men be paying penal¬ 
ties in the form of overwork, worry, and discouragement. 

The bankers have a true system of clearing exchanges. As an 
example of that, I call attention to the fact that in 1911 there was 
cleared through the 140 clearing-house associations $92,420,120,092. 
Their scheme is a good one for taking care of the exchanges of the 
country, and it helps the country as long as we have not a better one. 
By its use only $47.80 of actual cash was required in order to handle 
each $1,000,000 (of checks on the banks) that passes through the clear¬ 
ing houses. But unfortunately for us, the fees the bankers charge 
for putting our own credit on their books, before we are even enabled 
to draw checks, is so great that the people generally are overburdened 
by reason of it. 

Of course these exchanges should go on wherever they serve the 
general welfare, and since we ourselves have not provided a better 
method we are under obligations to the bankers for having honored 
and made current and merchantable our own credit. But since 
these exchanges relate to our business and are used directly by most 
of us at some time, and indirectly by all of us all of the time, we should 
establish a system that will give us the least costly service. The main 
thing for us to do is to eliminate most of the interest charges and make 
it practicable for the human family to thrive by industry by having 
industry available to all people who wish to be and are industrious. 
That does not mean that the banks should be superseded by new ex¬ 
change agents, but it does mean that the banks should be required 
to adjust to a new system that will cost the people less. It means 
also that there would be fewer banks, because under any economic 
system of exchange there would be no more necessity for several 
banks in cities of less than ten or twenty thousand people than there 
would be a need for several post offices in towns of that size. 

Let us take up the discussion from still another viewpoint in order 
that no one shall possibly misunderstand. Money as such is not a 
thing of prime necessity. It is merely a convenience which enables 


164 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

us to make such exchanges as we may wish without the cumbersome 
handling of property. 

The banks have taught us to use checks instead of the actual money, 
and it is true that they cash these, but, as we observed before, we can 
not draw checks until we have arranged with our banker, and in order 
to make that arrangement, unless we have the real money, we must 
pay him interest at a rate that makes the greatest number of men poor 
and a few enormously rich. The fact that the bankers can make 
exchanges that represent hundreds of billions of dollars annually, 
when, as a matter of fact, there never was at any one time as much 
as $1,700,000,000 in all of the banks combined, and of the money they 
do actually hold, which is approximately $1,500,000,000, two-thirds 
of it or more is lying dead in their vaults as reserves and is never used. 

We are under obligations to the banks for teaching us this economy 
in the use of money and credit. But, after all, as we observed before, 
the credit is supported and maintained by the resources of the people 
and the daily application of their energy. The banks have simply 
filled the office of making it current and merchantable. We do not 
owe that tribute to the bankers, and, thanking them for the good that 
they have done, but for which they have been overpaid, we are now 
prepared as a people in our national capacity to pass the necessary 
laws and to perform the governmental function laid down by the 
Constitution, “To coin money, regulate the value thereof” (and “of 
foreign coin” when used in our country) in behalf of all the people 
of these United States. We should profit by the example of the 
banks in copying somewhat after some parts of the system they have 
used for malting exchanges, but as a Government we ought to furnish 
the advantage to all of the people on equality and with the least 
expense practicable. The Government can do what the banks are 
domg and save to the people as much as the banks make in excessive 
dividends, besides the still greater profits that arc made on specula¬ 
tion on the side. 

The Government shall “coin money and regulate the value there¬ 
of.” That is the constitutional provision. The great special inter¬ 
ests have been sticklers for following the Constitution whenever it 
has blocked the way to the people’s progress if that might in any way 
interfere with the practice of the interests, but whenever the special 
interests find it to their advantage to follow any practice profitable 
to them, the fact that such practice may be in contravention to the 
Constitution and the laws does not in the least embarrass or hinder 
them, as long as the people do not invoke the law. When the people 
do, every possible dilatory tactic is resorted to by the interests to 
delay compliance. The consequence has been that the Constitution 
has often been used as an instrument to prevent the people from 
enforcing their rights. 

“Sound money” will be the song that will be sung to you by every 
advocate of the special interests. I have shown, and they have 
already stated and proved, that what they have in the past called 
“sound money” is not “sound.” By doing that they aid me. By 
that admission they disclose the fact, and it is a fact, that they have 
defrauded all of the people by their so-called “sound money.” Their 
kind of sound money has enabled them to become wealthy and inde¬ 
pendent, but it has prevented the people generally from doing what 


CHANGES IN THE BANKING AND CURRENCY SYSTEM. 165 


they have a right to do, and should have done, namely, retained the 
fruits of their own labor. 

The kind of exchange that we should use is the kind that anybody 
who has value to give can get without paying usury. That kind will 
be the sound money of the people—the honest money. Those who 
wish gold may have it—there will be nothing to prevent their buv- 
ing it. We, the people, on their presenting it, will stamp its weight 
and fineness for anyone who will pay the cost of doing so. We will 
do that to insure to the people who wish the gold the amount the 
Government stamp certifies that there is in any given piece of metal. 
That is honest, and to do anything more is dishonest to the people, 
but the Government could not say that it was legal tender and thereby 
give it a special quality that it did not possess in itself. We can do 
the same with any commodity that it is practicable to use as a thing 
of exchange. The demand for commodities of all kinds will be in pro¬ 
portion to the service they may render to the people, and no one 
should complain when absolute justice is to be done. As a conse¬ 
quence the Government would create no more “commodity” money 
either for itself or for the people, because it would not only be unjust 
to do so but unnecessaiy and ridiculous. When anyone wishes 
commodities let them buy them as such. 

Everybody knows that we must have money, and now the ques¬ 
tion arises as to what kind it shall be. “Honest money,” of course, 
instead of what we have now and are told is “sound money,” whereas 
in truth it is the opposite of “honest money,” and should have 
been named accordingly. We want a kind of money the buying 
and selling properties of which remain respectively constant. In 
other words, we want a kind of money that will buy the exact equiv¬ 
alent of what it cost us to get it. We want the kind of money that 
serves the same office among the people in their commercial and 
social relations with each other as the drafts and checks serve in 
the business transactions entered into by the bankers. We do not 
intend that the bankers shall have a better system for themselves 
than we have for ourselves. We expect to pay those whose duty 
it will be to help make the exchanges. The bankers will be able 
to give as effective and valuable service in this other up-to-date 
system as they have given us heretofore, but the past service has 
been altogether too expensive and therefore not sufficiently effective. 
We have no prejudice to vent upon the bankers. As the system 
stands they serve the people, generally, the best they can. There 
are always, of course, a few isolated exceptions. But the time 
for us to do for ourselves what the bankers are doing for themselves 
is here and now, and we should hasten to adopt a system of exchange 
under which it will cost the people no more to make their com¬ 
mercial exchanges between each other than it costs the banks to 
make exchanges between the bankers and their cash customers. 
It is just as simple for us as it is for them, and we have the indis¬ 
putable right. We owe it to ourselves, to our children, and to all 
posterity to have an efficient, self-sustaining, and effective system. 

The people are the Government. Therefore the Government 
should, as the Constitution provides, regulate the value of money. 
There is no other real sovereign power, because all authority emanates 


H>6 CHANGES IN THE BANKING AND CURRENCY SYSTEM. 

from the people. Money is the means of exchange among all peo¬ 
ple. Its regulation is absolutely a governmental function, and the 
Government has no natural inherent power that enables it to impart 
to money any other property or quality than that of making it the 
agent of exchange. 

Congress is not justified in passing an act that does not do com¬ 
plete justice to all. Merely to improve a false old system, but still 
leave it in operation, to continually force a sacrifice of the people's 
very life energies, is criminal. The Glass bill is a living picture ot 
the deplorable effects of the treasonable caucus system and the gag 
rules by means of which a few leaders control legislation. As a result 
the outrageous policy of extorting usury from the people to pay 
monopoly is to be continued. It is not conceivable that the Members 
of this House, if freed from the caucus gag, would stand for the Glass 
bill to continue a false system simply by providing 12 new houses for 
it to operate in. By the failure of Congress to enact a proper bill 
an overwhelming majority of the people will still be compelled to 
work too many hours per day, receive too small pay for what they 
do, and pay too much for what they buy, and therefore have but 
few of the advantages that the present-day civilization owes to them. 
And all this is done for the purpose of allowing those who control the 
material productions of the people, and the credit supported by the 
people, to charge them excessive interest, rents, and dividends, 
which when compounded by the usages of business, impoverish the 
people generally. Do the Members of this House expect that such a 
system can stand in the face of the growing intelligence of a nation 
of self-respecting people? The Members who have, by the caucus 
and the rules that gag, prevented the presentation to the House of a 
bill in every respect true to the people, on which a record vote of the 
Members unfettered would force adoption, will have to answer. The 
people will reply with the truth when they learn what Congress has 
done. This monetary legislation is a test case to divide those who 
favor from those who do not favor measures suited for the general 
welfare, but unfortunately many a Member will be able to hide behind 
the curtain cast around him by the secrecy of the caucus. 

C. A. Lindbergh. 

Note. —At the last meeting of the committee my objections as to 
the amount of reserves required were met by amendments. There¬ 
fore my objections as to the reserve requirements are removed. 

C. A. Lindbergh. 


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